Explore BrainMass

Foreign Direct investment (FDI) and its effects on the host and home countries

Resource-transfer effects, employment effects, balance-of-payment effects, and effects on competition and economic growth are the major benefits a country receives from inward FDI. Three costs of FDI concern host countries, namely: 1) they arise from possible adverse effects on competition within the host nation, 2) adverse effects on the balance of payments, and 3) the perceived loss of national sovereignty and autonomy.

Respond to the following:

Discuss the benefits and costs of FDI from the perspective of a host country and from the perspective of the home country.

Solution Preview

Foreign direct investment (FDI) is a process whereby a company produces or markets a product in a foreign country through investments in facilities. The host country is the country in which the foreign company invests. The home country is the country in which the company's headquarters is located. The benefits and costs of FDI from the perspective of the host country and from the perspective of the home country are discussed below.


FDI can have a positive effect on the economy of a host country providing capital, technology and management resources. Without FDI, these resources might not materialize. These forms of resource transfers from the home country to the host country can help to stimulate the economic growth of the host country.

FDI often involves transferring modern technologies to developing countries. These technologies are typically cleaner for the environment than the technologies that are used locally, In addition, as the locals imitate these modern technologies, the economy of the host country is improved. Similarly, the host company may imitate employment practices and supply-chain practices, leading to general improvements in the economy of the host county.

From the point of view of the home country, in some cases, the home country does not transfer the most desirable resources—such as cutting-edge technology—to the host country as this may cause the home country to lose its competitive advantage.


FDI often creates employment in the host country. In these countries, capital is usually scarce, but labor is abundant. FDI directly increases employment rates in the host country by employing residents from the host country. As the employees of ...

Solution Summary

This solution discusses the benefits and costs of foreign direct investment. Answered in 1056 words. Seven sources cited.