Benefits and advantages of foreign direct investment (2024)

What are some of the benefits of FDI?

Foreign direct investment (FDI) is made when a business takes controlling ownership in a company, sector, individual, or entity in another country. Through FDI, foreign companies are directly involved with day-to-day tasks from the other country, resulting in a transfer of money, knowledge, skills, and technology.

In general, FDIs are made in open economies that have a skilled workforce and the potential for growth. Foreign direct investment takes place when an investor establishes foreign business operations or acquires foreign assets including initiating ownership or controlling interest in a foreign company.

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There are various levels and forms of foreign direct investment, all of which depend on the type of companies involved and the reasons for the investment. An FDI investor might purchase a company in a targetted country by means of a merger of acquisition, setting up a new venture, or expanding an existing one. Other forms of FDI include the acquisitions of shares in an associated company, the incorporation of a wholly-owned business, and participation in a joint venture across international boundaries.

While typically positive, investors should always determine if FDI is advantageous to companies and the community. Below, we’re going to list a handful of benefits of foreign direct investment.

Benefits of FDI:

Economic development stimulation:

• FDI can stimulate a target country’s economic development and create a more conducive environment for companies, the investor, and stimulate the local community and economy.

Easy international trade:

• Countries usually have their own import tariffs, which makes trading rather difficult. A lot of economic sectors usually require presence in the international makerts to ensure sales and goals are met. FDI makes all of these international trade aspects a lot easier.

Employment and economic boost:

• FDI creates new jobs and more opportunities as investors build new companies in foreign countries. This can lead to an increase in income and mor purchasing power to locals, which in turn leads to an overall boost in targetted economies.

Tax incentives:

• Of course — taxes. Foreign investors receive tax incentives that are very beneficial regardless of your selected field of business. Everybody loves a tax write-off.

Development of resources:

• The development of human capital resources is a big advantage of FDI. The skills gained by the workforce through training increases the overall education and human capital within a country. Countries with FDI are benefiting by developing their human resources all while maintaining ownership.

Resource transfer:

• Foreign direct investment allows for resource transfers and the exchanges of knowledge, technologies, and skills.

Reduced costs:

• Foreign direct investment can reduce the disparity between revenues and costs. With such, countries will be able to make sure that production costs will be the same and can be sold easier.

Increased productivity:

• The facilities and equipment provided by foreign investors can increase a workforce’s productivity in the target country.

Increase in a country’s income:

• Another big advantage of foreign direct investment is the increase of the target country’s income. With more jobs and higher wages, the national income normally increases which promotes economic growth. Large corporations usually offer higher salary levels than what you would normally find in the target country, which can lead to an increment in income.