Benefits of FDI to host countries and companies

Author: Iloka Benneth Chiemelie 

Published: 8 /12/ 2013

1.0 Introduction

The Organization for Economic Co-operation and Development (OECD, 2002) presented a detailed analysis of the benefits associated with FDI for both the host nation and the investing company in their paper titled ‘Foreign Direct Investment for Development: Maximising Benefits, Minimising costs.’ Their analysis will be used in this study as it is based on researches conducted in different developing nations.

2.0 Benefit of FDI to host country - A case of Emerging Markets

Besides the basic macroeconomic stimulus gained from the actual investment, (OECD, 2002) noted that FDI enhances the economic growth of host country positively by raising the total factor of productivity and the efficiency of resources use in the host country. It was also noted that this is possible through three channels in the form of relationship established between FDI and foreign trade flow, slipovers and other external factors that influences the host country’s economic section, as well as direct impact on the structural factors in the host country. This is true because once foreign companies enter the host country, the boost importation as they sources for the right material to enhance their productivity and as such they directly influence amendments in policies geared towards further liberation that will mean yield economic growth as more companies are given the open door to enter the market.

Still in line with the economic growth discussed above, OECD (2002) noted that FDI enhances trade and investment in the host country. This is because once the companies enter, they still maintain businesses in their advanced markets (advanced nations) and as such productions are done in the host country while resources are sourced from the advanced nations, which will directly influence trade between these nations as well as investment into the economy to further boost productivity.

The third benefit to the country is that FDI enhances the transfer of technologies and development of human capital in the host country (OECD, 2002). This is because most of the international firms come from advanced nations and adopt advanced technologies to ensure sustainable production. When these companies enter the host country, they bring along these technologies. Additionally, the train the workforce available in the country on how to operate the technologies in order to ensure that reduction in salary package is still maintained. The end product is transfer of technologies to the host nation and the development of the host nation’s workforce.

3.0 Benefit of FDI to the investing company – A case of Emirate Airline in Nigeria

Increased profitability through reduced salary package is one of the ways that investing companies benefit through FDI (OECD, 2002). This is because most of the emerging economies such as China, India, Nigeria and Brazil have higher manpower available at reduced cost when compared with the advanced nations and as such the company will be making more profit through FDI by adopting a lower salary package. Since the Nigerian workforce is priced cheaper than the Saudi Arabian workforce as a result of differences in currency and salary standards, Emirate airline is able to increase profit by reducing salary expenses.

Another benefit of FDI to the company is that it increases competition (OECD, 2002). Through FDI, the company will be able to make available its products in a new market (the host country) and also increase the quantity available in their existing market. This will increase their global competition and profitability through an increase in productivity and presence in more markets. Through their presence in Nigeria, Emirate airline increases competition through targeting Nigerian customers and customers from the neighbouring countries while also maintaining presence in their other markets across the globe.

Enterprise and management skills development (OECD, 2002) is the third benefit for companies. Through FDI companies will be able to acquire new management skills through the management of their establishment in the host country and it will enhance their enterprise development and management competences – which are necessary for increased competition through human capital. Emirate enhances its enterprise by learning about management and enterprise related skills across the sub-Saharan and African region through its presence in Nigeria.

4.0 Conclusion

The clear message passed from the above analysis is that FDI is very beneficial to both the host country and the company in a number of ways. In any case, there is a need to understand that these benefits will only be tapped if the subject is aware of such benefits and adopt the right strategy to reap it.

References

The Organization for Economic Co-operation and Development (OECD) (2002), “Foreign Direct Investment for Development: Maximising Benefits, Minimising costs.” Available at: http://www.oecd.org/investment/investmentfordevelopment/1959815.pdf [Accessed on: 12/07/2013].