Impact of Foreign Direct Investment

Attracting foreign direct investment (FDI) has become a key part of national development strategies for
many countries. They see such investments as bolstering domestic capital, productivity, and
employment, all of which are crucial to jump-starting economic growth. While many highlight FDI's
positive effects, others blame FDI for "crowding out" domestic investment and lowering certain
regulatory standards. The effects of FDI can sometimes barely be perceived, while other times they
can be absolutely transformative. While FDI's impact depends on many conditions, well-developed and
implemented policies can help maximize its gains.

The resources in this list focus on the impact of FDI on:

Economic growth: Foreign capital stocks combined with the widespread belief that FDI is beneficial for
growth triggered a large body of literature on the determinants of FDI in the Central and Eastern
European transition countries. The primary goal was to locate all relevant economic and political
factors which could be beneficial for FDI inflows and, by extension, for economic growth(Neuhaus,
2005).

Trade: The direct impact falls into two parts, namely an immediate effect emanating from the actual
investment and the effects on the import pattern of the targeted enterprises. The former channel is
generally limited to the imports of initial inputs of imported machinery and equipment (especially in
Greenfield investment), or, where FDI is large compared with the size of the host economy, it may
include the knock-on effect on aggregate imports from rising total domestic demand. The second
channel, which essentially depends on the investors' choice between imported and local inputs, has
been studied extensively(OECD, Direct Impact of FDI on Imports, 2002).

Employment and skill levels: In response to the AFL-CIO's (American Federation of Labor and
Congress of Industrial Organizations) earlier claim that job losses result from the impact of runaway
firms setting up labor- intensive operations in offshore locations, the US tariff commission analyzed
then- new data on the foreign operations of US firms. It found that employment gains generated from
associated exports of equipment and parts, etc. and expansion of supporting non-production jobs
would be large enough to offset possible job losses arising from production displacement effects(Neil
Hood, 1979). In response to the latest concerns of the US labor unions, 23 studies have investigated
the impact of FDI on employment. All except one have concluded that it has a positive effect resulting
in the net increase of jobs(Lee, 2002).

Technology diffusion and knowledge transfer: Are of great importance for economic development, as
the adoption of new techniques, machines, and production processes is a key determinant of
productivity growth. Given that most research and development (R&D) and innovation is undertaken in
high income countries, most developing economies must rely largely on imported technologies as
sources of new productive knowledge. This is not to say that no R&D is undertaken in developing
countries; a considerable amount of follow-on innovation and adaptation does occur there, contributing
to the global stock of knowledge(Smarzynska Javorcik, 2006).

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