What is the role of FDI in the economic development of the host country?

Role of FDI in the Economic Development of the Host Country.

Foreign Direct investment (FDI) has an important role to play in the economic development of the host country. Private foreign investment goes directly into capital formation and thus constitutes a net addition to investible resources in the host country. The most important contribution of FDI is the spread of modern technology and efficient management methods.

Further foreign investment induces more domestic investment in the form of ancillary domestic units. Foreign Direct investment (FDI) encourages the growth of skills. FDI results in a pattern of growth favorable to host country since new products are introduced and marketed, new tastes are created and specific needs of the host country are met.

However, Foreign Direct investment (FDI) has its role in the initial stages of development of host country. Excessive dependence on FDI is harmful in terms of economic cost and political interference. One has to be selective in seeking FDI. Further, the government of the host country should have sufficient regulations to monitor the activities of foreign enterprises. FDI is like a medicine and should be used when required.

There are a number of countries which have developed without Foreign Direct investment (FDI). These countries include Japan and South Korea. On the other hand, there are a number of countries which are developing as a result of FDI. To sum up, FDI brings four “E”s — efficiency, equity, experience and expertise. In return there is fifth “E” — expatriation of profits