Foreign Direct Investment can have both positive and negative impacts Essay

Foreign Direct Investment can have both positive and negative impacts on both the host and home country - Essay Example These can be in the form of outright acquisition of a firm or a joint venture or construction of a facility. It can also include an association with a local company to gain rights for attendant input of technology (P. Graham and R. Barry Spaulding, n.d.). â€Å"It was twenty years ago that the late Stephen Hymer wrote his seminal thesis on Foreign Direct Investment (FDI) and multinational enterprises (MNEs). Since then the literature on these subjects has increased substantially and taken different directions, placing the multinational firms at the crossroads of many disciplines and of many debates as well†. (A.L. Calvet, p.43) Foreign direct investments of larger magnitude have deep effects on the economy of both the entities. Here with the help of real examples, it will be discussed how these effects can be positive as well as negative. As for this purpose we are focusing on both the host and home countries separately, so the advantages and disadvantages will be considered s eparately as well. But for the record it must be highlighted that these advantages and disadvantages are not fixed but, on the contrary, they are relative to both the host and home countries and their collective policies. HOST COUNTRY: ADVANTAGES The biggest advantage that a host company can derive from foreign domestic investment (FDI) is the globalization of its operations. Many large countries are focusing on it, e.g. China is the largest FDI host in the developing world. To compensate for the advantages that could be derived from these foreign investments, China has undergone significant changes with respect to its policies related to the FDIs. Until the mid 1980s FDIs were focusing on the construction sector involving the construction of hotels and apartments in the tourism and service industry. In 1986 China issued a new policy which encouraged the FDI into various other technically advanced sectors. These included manufacturing enterprises whose main focus was export and some basic industries such as new materials and agricultural. After these changes approximately 60% of the total foreign investments were part of the manufacturing sector of China (Yingqi Wei, Xiaming Liu, 2001). But from 1994 onwards, the investment boom in China seemed to go downhill. The statistics for foreign direct investments in terms of projects and contractual agreements turned negative and the growth rate of realized FDI also fell. The trend continued till 1999. But then in 2000 China recovered and since then it has closely monitored the inflows and outflows related to the foreign direct investments into its entities (Yingqi Wei, V. N. Balasubramanyam, 2004). Similarly Chile has been a FDI friendly-nation in Latin America. An agency of United Nations in Chile named The Economic Commission for Latin America and The Caribbean (Eclac) reported an inflow of USD 8.03 billion making Chile the third largest foreign direct investment in South America. FDI in Chile is mostly focused in the sector of mining. A survey by UNCTAD has shown that inward FDI in the developing countries has risen from $481 billion in 1998 to $636 billion in 2006. Among China and Chile other countries benefiting from foreign direct investments include Singapore, Philippines and India in Asia and other