Pros and Cons of Foreign Direct Investment.

In the A Level syllabus FDI is part of Unit 11. One way that developing economies can achieve a rise in investment is to attract multinational companies. A multinational corporation (MNC) is defined as a firm that operates in more than one country. Through their activities, MNCs provide foreign direct investment (FDI) to the economies in which they operate. Foreign Direct Investment involves a multi-national corporation building a manufacturing plant, or other physical investment, in the economy in question. Such investment will undoubtedly bring benefits for the selected country; but there are also some serious drawbacks which must be taken into account in evaluating the desirability of FDI. In 2022 FDI dropped by 24% – see graphic.

Benefits

• FDI can help to plug the savings gap – the difference between the level of savings and the amount of investment needed.

• The MNC will import valuable foreign exchange into the country

• A large amount of jobs will be created directly – i.e. employed in the new factory

• But employment will also be created indirectly, through the multiplier effect.

• MNCs can introduce new technology into the country – and educate their workers as to its use

• If profitable, they generate valuable tax revenue for the government.

Drawbacks

• MNCs tend to invest in urban areas. This widens the gap between urban and rural incomes – and aggravates the problem of rural-urban migration [see previous note].

• Many MNCs have been accused of exploiting their workforces. For example, they may force workers to work in unsafe, or simply miserable, conditions; they may employ children, and pay shockingly low wages (by Western standards). For an alternative view on this, see Paul Krugman’s article, ‘In Praise of Cheap Labour: bad jobs at bad wages are better than no jobs at all’ – but this isn’t essential for the exam.

• MNCs are also accused of exploiting local environments, by polluting air and rivers, cutting down rainforests, or by reducing biodiversity. See previous note on ‘environment and sustainability’.

• Any dividends and profits are likely to be shipped back to the international headquarters somewhere in the developed world.

• Finally, MNCs often use inappropriate, capital-intensive production methods, thus preventing countries from exercising their comparative advantages in labour-intensive industries.

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