Foreign Investment is more stable than fund inflows

In recent years, “hot money” or speculative capital has flown into many developing countries leading to their stock markets becoming overvalued.

Foreign direct investment on the other had is more stable because the foreign businesses setup physical infrastructure as well as due to the fact that many developing countries do not have full convertibility of their currency on the capital account.

In contrast, we are often treated to the spectacle of stock markets crashing because foreign funds have left the country in a hurry and have dumped the stocks.

Technology Transfer

Though this aspect was debated hotly in the 1990s when foreign businesses started to expand, technology transfer does take place.

The point to be noted here is that technology transfer takes place more in joint ventures rather than subsidiaries as the local partners get the exposure in the former. This is one reason why many patent intensive multinationals set up subsidiaries instead of joint ventures.

Of course, it is also the case that the developing countries have wizened and are insisting on technology transfer as a prerequisite to allow foreign businesses into their countries. Moreover, when developing countries import capital goods on a bulk scale, they also insist that the capacity to manufacture them be part of the agreement.

Exposure to Global Best Practices

A major benefit to the developing country is the exposure to global best practices that accompanies foreign investment. Because most of the multinationals that setup shop in developing countries are world-class companies, they bring with them global best practices in their chosen sectors, which can benefit the target countries and the workforce in them.

For instance, because of the presence of so many multinationals in the software sector in India, the homegrown companies have adopted some of the HR practices of these multinationals leading to beneficial effects.

Employment Generation

While many debate the aspect of creating jobs by foreign businesses in the developing countries, one has to accept that foreign investment does create jobs both directly and indirectly.

For instance, the direct employment generated by the foreign businesses supports the ecosystem around the factories and the plants wherein those employed by the foreign business live. This is because these employees need to eat, commute, and live apart from their working hours, which means that they need sustenance from local businesses that cater to them and their families. Moreover, suppliers, vendors, and local communities benefit because of the ecosystem support that factories of the foreign businesses engender in their locations.

Closing Thoughts

This article has primarily focused on the benefits of foreign investment to the developing countries. However, there are downsides as well and these would be discussed in subsequent articles.

In conclusion, foreign investment benefits developing countries if the terms and conditions are favorable or even balanced between them and the foreign businesses. Of course, to reach such a stage where equal bargaining takes place, the developing countries must have a base from which they can negotiate on a position of strength.