The benefits of FDI depend on the host country’s level of economic development and whether the investment is complementary to, or competitive with, local real and financial resources. Economic research shows that FDI can genuinely aid development financing when it brings in real resources and does not contribute to contraction in domestic output and employment. There are, however, some factors regarding FDI that require attention:
- Changes in local resources allocation, including employment and finance: FDI is most beneficial in economies that are short of real resources such as industrial capacity, foreign exchange reserves, or commodities. In economies with export surpluses, FDI can still be helpful because it can bring technology transfers and access to international markets.
- Development of local capital markets: FDI is most additive as a source of finance in markets where capital is scarce. However, the degree to which FDI can provide additional sources of capital also positively correlates with the development of local financial markets.
- Local resources and assets: According to some economic analyses, FDI through mergers and acquisitions (Brownfield investing) has a lower contribution to local development, as it brings financial resources but not real resources. In addition, M&A has the effect of “de-nationalizing” economies by shifting control over productive assets from domestic nationals to foreigners.
The need to align FDI with local development priorities is often reflected in international investment agreements (IIAs), where recipient countries specify their expectations for the contribution of private international investments. It is also reflected in the policies of investment promotion agencies (IPAs) in developed and developing countries, which often focus on projects and FDI that they believe will contribute most to their own development priorities.
