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Introduction
Inward foreign direct investment (FDI) is a concept that has gained momentum over the recent past. Several countries in the world have implemented the provisions of the concept in their quest to attain the much-desired economic development. The concept implies encouragement of foreign investments in countries, which need economic development. While proponents of the concept highlight the various advantages associated with inward FDI, opponents of the concept argue that it has demerits that outweigh its merits. Remarkably, proposers of the concept explain that inward FDI has benefits like infrastructural development, exchange of skills, and employment. According to the proponents, implementation of the concept in a particular country is an ingredient that catalyses economic development. Conversely, opponents of the concept argue that the demerits linked to inward FDI are detrimental to the host populations and the country. In their argument, they explain that by implementing the concept the country becomes vulnerable to foreign degradation, exploitation of the host employees, and loss of capital through leakages. It is within this backdrop that the paper examines the merits and demerits of inward FDI in attaining sustainable economic development of countries.
Discussion
Background and Definition
Fundamentally, inward FDI is a concept that involves encouragement of foreign investors into a country that is in need of economic development. In effect, a number of countries that encourage inward FDIs need foreign investors in their host destinations to propel and improve their state of economy. China, the United States, Mexico, and Mauritius are among the countries that have enjoyed the merits and experienced the demerits of the concept. Dunning and Narula (2004) and Alm (2006), explain that encouragement of foreign investors require a number of incentives, which comprise use of EPZs, Maquiladoras, and deregulation of tax. By using the incentives to encourage inward FDIs, countries win the hearts and minds of investors, and thus, initiate a series of investments and a simultaneous economic progress. When governments create zones that are free from taxes, investors flood the destination as it provides an attractive venture for their businesses (Asian Development Bank 2009). Moreover, Maquiladoras, an incentive practised in places such as Mexico, which involves exemption of tax on some equipments used in manufacture and assembly of products, is another incentive that is instrumental in encouragement of FDIs.
Advantages of Inward Foreign Direct Investment
Inward FDI is very important in economic progress of a particular nation. The gains or advantages associated with the concept of Inward FDI include exchange of skills, economic and infrastructural development, and employment of the host populations. In the course of investment, foreign firms employ the host populations to work in delivery and execution of their operations. Shenkar, Luo, and Chi (2014), state that the host population acquire employment, a factor that is important in minimising the rate of unemployment especially in developing countries. While a number of individuals can acquire direct employment from the processing plants, others engage in indirect forms of employment.
People, who sell food and beverages to employees working directly in the foreign firms, engage in indirect employment resulting from the establishment of the FDI. Consequently, those, who design clothes, shoes, and other requirements of the FDIs, also enjoy a form of employment, which may be self-employment. Currently, several countries are enjoying the gains derived from the concept. In the assertion of Thomas (2010) and Cavusgil et al. (2014), countries such as the United States, China, and Mexico are among the leading countries, which utilise the gains attained from inward FDIs. The implication of the assertion is that FDIs play an integral role in advancing the overall development of a subject country.
Disadvantages of Inward Foreign Direct Investment
Conversely, while implementation of inward FDI presents various advantages to the host populations, it also has a number of disadvantages. By implementing the concept, a country becomes vulnerable to exploitation of its populations by foreign investors, who may disregard the hosts. Furthermore, the country becomes vulnerable to exploitation of resources, which at times may be left in a derelict state after the investments. Another demerit is leakages, which transpires when the investors channel their profits to their home countries. When foreign firms establish their business in a given country, they may subject the host employees to harsh working conditions, poor pay, and exploitation. Moreover, the firms may hire small children and underpay the populations hired to work in their establishments. Bitzenis (2009), Easson (2004), and Sklair (2012) highlight that in various countries such as China and Mexico, which exercise the concept of inward FDI, some of the populations complain about the disconnection demonstrated by foreign establishments. Absence of provisions that advocate for promotion of infant firms in host destinations is another disadvantage linked to the concept of inward FDI.
Empirical Evidence
Review of the Benefits and Shortcomings of Inward FDI Involvement in China, Vietnam, Mexico, and Mauritius
China, Vietnam, Mexico, and Mauritius are among the countries that have implemented the concept of inward FDI. These countries have experienced the challenges associated with the concept and enjoyed the benefits of implementing the concept. Challenges such as leakages, exploitation of employees, harsh treatment, as well as introduction of unwanted behaviour in the host country comprise the challenges experienced by these countries. In Mexico, implementation of Maquiladoras led to exploitation and underpayment of female employees from the host population (Tuttle 2012; Katz & Correia 2001; Franzini 2001). Therefore, it is evident that the countries have experienced the demerits associated with implementation of the concept. On the other hand, the countries have also enjoyed the benefits associated with the concept. Infrastructural development, employment, and economic empowerment are among the benefits that countries like China and Mauritius have enjoyed in the aftermath of implementing the concept. According to Hufbauer and Schott (2013), China has gained more than $124 billion from inward FDI, a figure that would not have been realised in the absence of the concept. As such, the concept has led to various developments in the country.
Conclusion
Inward FDI is a concept that has received support and opposition from various researchers and stakeholders all over the globe. The support and opposition of the concept emanates from its merits and demerits. Provision of employment opportunities, exchange of productive skills, technologies, and ideas, as well as economic development are some of the merits associated with the concept. Conversely, leakages, exploitation of host employees, disconnection, and dominance of foreign companies over domestic companies are the demerits that come with implementation of the concept. It is imperative for countries to lobby WTO to institute a policy that supports growth and development of infant companies in host countries. Additionally, countries should concede to foreign investments as long as they abide by the terms that focus on development and fair treatment of host employees. The provisions of every government can vary depending on their level of development and objectives that initiated implementation of the concept. However, the overall goal of the provisions that govern implementation of inward FDI needs to emphasise on fair treatment of the host populations and economic development of the subject country.
Reference List
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