What are the Advantages and Disadvantages of FDI? | Espresso

FDI Advantages and Disadvantages

Foreign Direct Investments, known as FDIs, are defined as investments made by an organization or an individual in a particular country in a business located in another country. Foreign direct investments are crucial for the rise and development of market countries. Developing countries need funding and expertise for structuring, expanding, and guiding their international sales.


Published on 02 March 2023

Global companies require private investments to fund their energy and water needs and to increase jobs and salaries for their employees.

Various Foreign Direct Investment benefits can be clubbed into the advantages of FDI.

This article will tell you about FDI's advantages and disadvantages. Let's look at what FDI is first.

What is FDI?

Foreign direct investment has become extremely popular in recent years. One of the most significant immediate foreign investment benefits is that its perks are enjoyed by both parties involved. Thus, FDI is an attractive mode of investment. Whenever a foreign company invests in a domestic company, it is referred to as "FDI".

FDI is the acquisition of a significant stake by any foreign entity. It can serve the purpose of boosting global presence and expanding business on a larger scale. There are various types of FDI, such as horizontal FDI, vertical FDI, conglomerate FDI, and platform FDI.

Let's now look at the benefits or advantages of foreign direct investment.

Advantages of FDI

There are numerous advantages of FDI, such as

●       Economic development

Foreign direct investment helps stimulate a country's economic development, creating a conducive environment for the investors and helping benefit the local industries as well.

●       Employment boost

FDI creates new job prospects. Just as investors build new companies, it creates new opportunities, increases income, and increases the buying power of individuals. This helps boost the economy as well.

●       International trade with ease

Every country has its own import tariffs, which is why trading can be pretty tricky. Also, various industries require their presence in international markets to ensure goals and sales.

●       Development of Human Capital Resources

Another significant Foreign Direct Investment benefit is that it helps develop human capital resources. Human capital is the knowledge and competence of those who make the workforce. A country with FDI can increase education and the overall human capital of a nation. Moreover, a country with FDI can benefit by developing its human resources and maintaining ownership at the same time, since the resources of a country are not tangible assets but something that is on loan.

●       Tax incentives

As a foreign investor, you can get tax incentives that will be highly useful in the selected business area.

●       Enhancing the country's finance and technology sector

The entire process of foreign direct investment is robust. For instance, when foreign direct investment occurs, businesses are provided with access to the latest tools in technology, finance, and operational practices. As time passes, introducing enhanced technologies gets integrated into the local economy. This makes the fin-tech industry more effective and efficient.

●       Other advantages

Apart from all the other points mentioned above, there are a few other advantages that cannot be ignored. For example, Foreign direct investment develops a country's areas and helps transform it into an industrial center. The goods that are produced through FDI are marketed domestically and exported abroad, creating an essential revenue stream.

Additionally, FDI helps improve a country's exchange rate and creates a competitive market and capital inflow. Last but not least, it helps smooth international relations.

Disadvantages of FDI

With so many advantages of FDI, there are some drawbacks too, such as

●       Negatively affecting the exchange rate

Foreign direct investment can affect the exchange rates in a way that can be detrimental to one country and beneficial to another.

●       High cost

Investing in a foreign country can be more expensive than exporting goods to that country. Therefore, keeping aside sufficient money to set up the operations is vital.

●       Political changes and their risk

It is often seen that political changes in any country can happen instantly. Therefore, foreign direct investment becomes extremely risky. Plus, these risks are also high.

●       Obstacles in domestic investment

FDI can sometimes hinder domestic investment as it focuses on the resources of other countries rather than the home country.

●       Economically nonviable

Foreign direct investment can sometimes be precarious and economically unviable as it is capital-intensive from an investor's point of view.


Having a defined foreign direct investment helps boost the economy and develop the nation. They are beneficial to both the domestic economy and the foreign country in which the investment has been made. Further, FDI translates into reduced costs for the investing country and develops the country's human resources, technologies, and skills, enabling FDI.

Common examples of FDI include acquisitions and mergers, retail services, logistics, and manufacturing.

Chandresh Khona
Team Espresso

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