Foreign Direct Investments (FDI) - Pros and Cons

Based on a lecture given at the Euro College Student Union Business Forum, Kumanovo, Macedonia, May 3, 2007

By: Sam Vaknin, Ph.D.

Malignant Self Love - Buy the Book - Click HERE!!!

Relationships with Abusive Narcissists - Buy the e-Books - Click HERE!!!

READ THIS: Scroll down to review a complete list of the articles - Click on the blue-coloured text!
Bookmark this Page - and SHARE IT with Others!

The role of foreign direct investment (FDI) in promoting growth and sustainable development has never been substantiated. There isn't even an agreed definition of the beast. In most developing countries, other capital flows - such as remittances - are larger and more predictable than FDI and ODA (Official Development Assistance).

Several studies indicate that domestic investment projects have more beneficial trickle-down effects on local economies. Be that as it may, close to two-thirds of FDI is among rich countries and in the form of mergers and acquisitions (M&A). All said and done, FDI constitutes a mere 2% of global GDP.

FDI does not automatically translate to net foreign exchange inflows. To start with, many multinational and transnational "investors" borrow money locally at favorable interest rates and thus finance their projects. This constitutes unfair competition with local firms and crowds the domestic private sector out of the credit markets, displacing its investments in the process.

Additionally, foreign investors tend to target countries with high tariffs (“tariff jumping”), thus increasing pressure on domestic manufacturers, adversely affecting the country’s terms of trade (via capital-intensive imports), and depriving the state of much-needed revenues. As Bhagwati and Johnson noted in the 1950s, under certain conditions which are common in commodity-producing regions of the globe, this can actually lead to immiseration despite growing capital investments and exports.

Many transnational corporations are net consumers of savings, draining the local pool and leaving other entrepreneurs high and dry. Foreign banks tend to collude in this reallocation of financial wherewithal by exclusively catering to the needs of the less risky segments of the business scene (read: foreign investors).

Additionally, the more profitable the project, the smaller the net inflow of foreign funds. In some developing countries, profits repatriated by multinationals exceed total FDI. This untoward outcome is exacerbated by principal and interest repayments where investments are financed with debt and by the outflow of royalties, dividends, and fees. This is not to mention the sucking sound produced by quasi-legal and outright illegal practices such as transfer pricing and other mutations of creative accounting.

Moreover, most developing countries are no longer in need of foreign exchange. "Third and fourth world" countries control three quarters of the global pool of foreign exchange reserves. The "poor" (the South) now lend to the rich (the North) and are in the enviable position of net creditors. The West drains the bulk of the savings of the South and East, mostly in order to finance the insatiable consumption of its denizens and to prop up a variety of indigenous asset bubbles.

Still, as any first year student of orthodox economics would tell you, FDI is not about foreign exchange. FDI encourages the transfer of management skills, intellectual property, and technology. In the long run, these exchanges between foreign headquarters and domestic operations create jobs in the host countries and improve the quality of goods and services produced in the economy. Above all, they give a boost to the export sector.

All more or less true. Yet, the proponents of FDI get their causes and effects in a tangle. FDI does not foster growth and stability. It follows both. Foreign investors are attracted to success stories, they are drawn to countries already growing, politically stable, and with a sizable purchasing power.

Foreign investors of all stripes jump ship with the first sign of contagion, unrest, and declining fortunes. In this respect, FDI and portfolio investment are equally unreliable. Studies have demonstrated how multinationals hurry to repatriate earnings and repay inter-firm loans with the early harbingers of trouble. FDI is, therefore, partly pro-cyclical. Additionally, investments by multinationals at home and abroad are highly correlated. In other words: when the firm suffers in its domestic market, it tends to reduce, freeze, or altogether withdraw investments all over the world.

What about employment? Is FDI the panacea it is made out to be?

Far from it. Foreign-owned projects are capital-intensive and labor-efficient. They invest in machinery and intellectual property, not in wages. Skilled workers get paid well above the local norm, all others languish. Most multinationals employ subcontractors and these, to do their job, frequently haul entire workforces across continents. The natives rarely benefit and when they do find employment it is short-term and badly paid. M&A, which, as you may recall, constitute 60-70% of all FDI are notorious for inexorably generating job losses. At best, in the short to medium term, FDI may encourage employment in the non-tradable sector, but not in the tradable one.

FDI buttresses the government's budgetary bottom line but developing countries invariably being governed by kleptocracies, most of the money tends to vanish in deep pockets, greased palms, and Swiss or Cypriot bank accounts. Such "contributions" to the hitherto impoverished economy tend to inflate asset bubbles (mainly in real estate) and prolong unsustainable and pernicious consumption booms followed by painful busts.

Alphabetical Bibliography: Contemporary View

Austria’s Foreign Direct Investment in Central and Eastern Europe:‘Supply-Based’or ‘Market Driven’? - W Altzinger - thInternational Atlantic Economic Conference, Vienna, 1999

Blessing Or Curse?: Domestic Plants' Survival and Employment Prospects After Foreign Acquisition - S Girma, H Görg - 2001 -

Competition for Foreign Direct Investment: a study of competition among governments to attract FDI - CP Oman - 2000 -

(The) Contribution of FDI to Poverty Alleviation - C Aaron - Report from the Foreign Investment Advisory Service - 1999 -

Corruption and Foreign Direct Investment - M Habib, L Zurawicki - Journal of International Business Studies, 2002

Determinants Of, and the Relation Between, Foreign Direct Investment and Growth - EG Lim, International Monetary Fund - 2001 -

Direct Investment in Economies in Transition - K Meyer - Cheltenham and Northampton (1998), 1998

(The) disappearing tax base: is foreign direct investment (FDI) eroding corporate income taxes? - R Gropp, K Kostial -

Does Foreign Direct Investment Accelerate Economic Growth? - M Carkovic, R Levine - University of Minnesota, Working Paper, 2002

Does Foreign Direct Investment Crowd Out Domestic Entrepreneurship? - K De Backer, L Sleuwaegen - Review of Industrial Organization, 2003

Does Foreign Direct Investment Increase the Productivity of Domestic Firms? - BS Javorcik - American Economic Review, 2004

Does foreign direct investment promote economic growth? Evidence from East Asia and Latin America - K Zhang - Contemporary Economic Policy, 2001

The Economics of Foreign Direct Investment Incentives - M Blomstrom, A Kokko - 2003 - NBER

The effects of foreign direct investment on domestic firms Evidence from firm-level panel data - J Konings - The Economics of Transition, 2001

Effects of foreign direct investment on the performance of local labour markets–The case of Hungary - K Fazekas - RSA International Conference, Pisa, 2003

(The) Effects of Real Wages and Labor Productivity on Foreign Direct Investment - DO Cushman - Southern Economic Journal, 1987

Employment and Foreign Investment: Policy Options for Developing Countries - S Lall - International Labour Review, 1995

Export Performance and the Role of Foreign Direct Investment - N Pain, K Wakelin - The Manchester School, 1998

Exports, Foreign Direct Investment and Employment: The Case of China - X Fu, VN Balasubramanyam - The World Economy, 2005

Facts and Fallacies about Foreign Direct Investment - RC Feenstra - 1998 -

FDI and the labour market: a review of the evidence and policy implications - N Driffield, K Taylor - Oxford Review of Economic Policy, 2000

Foreign Direct Investment and Capital Flight - C Kant - 1996 -

Foreign Direct Investment and Economic Development - T Ozawa - Transnational Corporations, 1992 -

Foreign Direct Investment and Employment: Home Country Experience in the United States and Sweden - M Blomstrom, G Fors, RE Lipsey - The Economic Journal, 1997

Foreign Direct Investment and Income Inequality: Further Evidence - C our FAQ, R Zone - World Development, 1995

Foreign Direct Investment and Poverty Reduction - M Klein, C Aaron, B Hadjimichael, World Bank - 2001 -

Foreign Direct Investment as a Catalyst for Industrial Development - JR Markusen, A Venables - 1997 - NBER

Foreign Direct Investment as an Engine of Growth - VN Balasubramanyam, M Salisu, D Sapsford - Journal of International Trade and Economic Development, 1999

Foreign Direct Investment, Employment Volatility and Cyclical Dumping - J Aizenman - 1994 - NBER

Foreign Direct Investment in Central and Eastern Europe: Employment Effects in the EU - H Braconier, K Ekholm - 2001 -

Foreign Direct Investment in Central Europe since 1990: An Econometric Study - M Lansbury, N Pain, K Smidkova - National Institute Economic Review, 1996

Foreign Direct Investment in Developing Countries: A Selective Survey - Luiz R. de Mello Jr. - NBER

Foreign Investment, Labor Immobility and the Quality of Employment - D Campbell - International Labour Review, 1994

Foreign direct investment-led growth: evidence from time series and panel data - L de Mello - Oxford Economic Papers, 1999

Home and Host Country Effects of FDI - RE Lipsey - 2002 - NBER

How Does Foreign Direct Investment Affect Economic Growth? - E Borensztein, J De Gregorio, JW Lee - Journal of International Economics, 1998

The Impact of Foreign Direct Investment Inflows on Regional Labour Markets in Hungary - K Fazekas - SOCO Project Paper 77c, 2000

(The) Impact of Foreign Direct Investment on Wages and Employment - L Zhao - Oxford Economic Papers, 1998

(The) limited Impact of Foreign Investment in the Americas - Kevin P. Gallagher and Andrés López -

(The) link between tax rates and foreign direct investment - SP Cassou - Applied Economics, 1997

Location Choice and Employment Decisions: A Comparison of German and Swedish Multinationals - SO Becker, K Ekholm, R Jäckle, MA Muendler - Review of World Economics, 2005

Much Ado about Nothing? Do Domestic Firms Really Benefit from Foreign Direct Investment? - H Gorg - The World Bank Research Observer, 2004


Multinational Corporations and Foreign Direct Investment – Stephen D. Cohen – Oxford University Press, 2007

Should Countries Promote Foreign Direct Investment? - GH Hanson - 2001 -

Taxation and Foreign Direct Investment: A Synthesis of Empirical Research - RA de Mooij, S Ederveen - International Tax and Public Finance, 2003

Trade, Foreign Direct Investment, and International Technology Transfer: A Survey - K Saggi - The World Bank Research Observer, 2002

Troubled Banks, Impaired Foreign Direct Investment: The Role of Relative Access to Credit - MW Klein, J Peek, ES Rosengren - The American Economic Review, 2002

Vertical foreign direct investment, welfare, and employment - W Elberfeld, G Gotz, F Stahler - Topics in Economic Analysis and Policy, 2005

Volatility, employment and the patterns of FDI in emerging markets - J Aizenman - 2002 - NBER

Who Benefits from Foreign Direct Investment in the UK? - S Girma, D Greenaway, K Wakelin - Scottish Journal of Political Economy, 2001

Why Investment Matters: The Political Economy of International Investments - Singh, Kavaljit - FERN (UK and Belgium)

Bibliography (courtesy ScienceDirect): Historical View

Interactions between domestic and foreign investment - Guy V.G. Stevens - (doi:10.1016/0261-5606(92)90020-X) - Journal of International Money and Finance, Volume 11, Issue 1, February 1992, Pages 40-62 – Published by Elsevier

Foreign direct investment, technology transfer and domestic employment effects - Tetsunori Koizumi and Kenneth J. Kopecky - (doi:10.1016/0022-1996(80)90028-8) - Journal of International Economics, Volume 10, Issue 1, February 1980, Pages 1-20– Published by Elsevier

Foreign direct investment with unemployment and endogenous taxes and tariffs -  James A. Brander and Barbara J. Spencer - (doi:10.1016/S0022-1996(87)80023-5) - Journal of International Economics, Volume 22, Issues 3-4, May 1987, Pages 257-279 – Published by Elsevier

The impact of foreign direct investment on export structure and employment generation - Carlos E. Santiago - (doi:10.1016/0305-750X(87)90016-7) - World Development, Volume 15, Issue 3, March 1987, Pages 317-328  – Published by Elsevier

Effects of foreign investment in the presence of unemployment - Satya P. Das - (doi:10.1016/0022-1996(81)90019-2)  - Journal of International Economics, Volume 11, Issue 2, May 1981, Pages 249-257– Published by Elsevier

Tariffs, foreign capital and immiserizing growth with urban unemployment and specific factors of production - M.Ali Khan - (doi:10.1016/0304-3878(82)90019-0) - Journal of Development Economics, Volume 10, Issue 2, April 1982, Pages 245-256– Published by Elsevier

Also Read

Foreign Investments - A Dialogue with the Prime Minister of Macedonia

Eastward, Ho - FDI in Central and Eastern Europe

Nation Branding, Place Marketing, and Investment Promotion

Copyright Notice

This material is copyrighted. Free, unrestricted use is allowed on a non commercial basis.
The author's name and a link to this Website must be incorporated in any reproduction of the material for any use and by any means.

Go Back to Home Page!

Internet: A Medium or a Message?

Malignant Self Love - Narcissism Revisited

Frequently Asked Questions about Narcissism

The Narcissism List Home

Philosophical Musings

Write to me:  or