The goal or aim of every investor is to gain profits. Investment is among the most preferred means of achieving the goal of profit maximization. Investment refers to buying of a financial commodity or a valuable item with a hope of future increased returns. It may mean using money to make more money. Foreign direct investment can be defined as the measure of investments, both long-lasting and on short term basis, aimed at achieving financial interest in enterprises, the operations of which are mainly outside the economical territory of the particular investor or investor groups (Wren 2006, p. #). Foreign direct investment (FDI) entails a particular investor seeking to control a market in a foreign country or region. It involves cooperating and bringing together assets from foreign countries into the domestic economy to promote the trade and running of a country without exhausting its natural resources (Patterson 2004, p. #). It involves trade across borders of countries through exports and imports. Trade between countries has been greatly affected by the FDI in that countries have developed close ties and, hence, good political and economical relationships.
FDI has greatly affected the growth of economies through the input brought about by the foreign firms to the host country. It seeks to provide new market opportunities, access to new technologies, cheaper production facilities and improvements in the products (Bora 2002, p. #). Firms and individuals seek to establish markets in different countries so as to diversify their services and reach out to people who might offer a better market than their local market. Foreign direct investment can be credited for providing more inflows to host countries. A host country is a state which accommodates institutions, companies or individuals from other countries in terms of business and other functions involving the economy. This paper seeks to establish the positive and negative effects of foreign direct investment on the host country.
Lipsey (2002, p. #) in the article Home and Host Country’s Effects of FDI tries to bring out the significance of foreign direct investment. It was established that foreign firms brought in more capital compared to local firms with the same capabilities. This can mainly be attributed to the foreign firms’ huge desire and urge to succeed in their endeavor and the need to ensure that the good relations that led to them being allowed to invest are maintained throughout their time of presence in the host country. These foreign firms also come in with well trained staff and state of the equipment to ensure that businesses run smoothly. Better equipment and dedicated staff members ensure better results and a better chance of achieving the aim of profit maximization.
One major impact of foreign direct investment to host country is the massive improvement in technology. Most foreign firms move to a country in search of investment opportunities and, in result, they invest in improving the technology of that country so that their business can run without major technological downfalls or constraints. The foreign firms are usually given the mandate to ensure the host country receives the best out of the trade and, therefore, they have to employ the best technology for best results (Lukac 2008, p. #). Most African countries have benefitted a lot in terms of technology, since they have developed good relations with leading economies like Japan, China, Britain and United States.
These leading economies deploy their people to carry out business in these developing countries and, thus, bringing in their technology. Alongside technology, skilled manpower is also gained, since the foreign firms bring in their people who are conversant with their technology, and they end up teaching the locals to work in the firms. The foreign, most of who have good managerial and entrepreneurial skills, end up passing numerous offers to the locals, who also look for opportunities in foreign countries to invest.
Foreign direct investment has also played a major role in the provision of resources to both the company and the host country. The inter-relation between countries enables them to exchange goods and resources easily among themselves, thereby, increasing trade and exchange of technology between them. Countries with resources like minerals and petrol that lack the equipment to drill engage in trade with others with the capability to produce such equipment and both end up benefiting instead of the resources lying idle (Liu 2001, p. #). During the explorations in the field the locals are given an opportunity to work and earn a living. Apart from them earning a living, it gives them opportunities to acquire new skills, improve the country’s GDP, thus, developing the economy of their country and, in turn, increasing the income of the foreign firms. Recently, Tullow Oil Company was given the mandate to drill oil in Uganda.
Foreign direct investment also has increased participation in segment production. A segment is a division within a corporation or a business entity that has the capability of making or earning its own revenue. In such way, different countries are able to produce different goods and through foreign direct investment, an agreement is reached on the kind of goods that a particular country exports to the other and vice versa (Hindelang 2009, p. #). This prevents the occurrence of an incidence whereby close countries produce similar goods, limiting their trading opportunities. Most countries have rapidly grown through the benefits and technological profits acquired by foreign direct investment and the efforts put towards ensuring that the intellectual relationship is thoroughly maintained.
Another benefit of the foreign direct investment initiative to the host nation is infrastructure development. Infrastructure has received a lion’s share in terms of growth, establishment and improvement based on capital acquired from foreign direct investment (Lukac 2008, p. #).A good example of a country that has greatly benefitted is the East African leader in economy, Kenya. Many foreign firms from Japan, China and the United States have developed good relations with Kenya and, in turn, they have given back to the people of Kenya by ensuring that they have left the infrastructure better than they found it by establishing new facilities, or improving the ones available. The foreign investors always work towards ensuring that they provide better products and services at the lowest cost possible.
Kenya’s good relations with China have seen the development of a multi-billion Thika superhighway upgrade to world class standards. This road is one of its kinds in Kenya and has made life easier to the more than 1 million people who use the road daily (Faeth 2010, p. #). The most common traffic jams that were a daily experience to the users of this road are now a thing of the past. Most people have also got employed in this project, thus, reducing the level of un-employment. Such benefits have a huge impact to the economy of a country, particularly a small developing economy like Kenya. Apart from improving the infrastructure, the projects carried out by the foreign direct investors improve the living standards of a country by raising those to acceptable levels. These good relations have been extended as far as Israel and Japan and Kenya are enjoying the benefits. Foreign firms such as SBI International, China Wu Yi and Shengli are the major companies and investors in the East African region. They invest mainly in road construction and other infrastructure improvements.
On the other hand, foreign direct investment can be argued to have caused negative impacts on any particular host country. According to Herman (2004, p. #), industrialization cannot go on without causing some minor negative effects to the society. Therefore, if a country is in the verge of developing, some negative effects will be experienced here and there, but they are far much inferior compared to the gains. One major negative effect of foreign direct investment on the society is environmental pollution. In Kenya, for example, the drilling of titanium in Kwale was seen to cause pollution of the environment because of the gases produced during the exploration. The emissions if inhaled poses serious threats to health of people. These gases pollute both the air and water and may cause diseases to the people who live around the area where the exploration is being carried out. Foreign direct investment may also be in list of activities that pollute the environment in that sometimes trees have to be cut down to pave way for mining and construction of firms at strategic points (Harrison & Aitken 1994, p. #). This, consequently, reduces the land which was under forest cover in most countries drastically. Deforestation may cause change in weather patterns; this may drastically affect livelihood of the people who depend on agriculture for survival. In some countries, however, this negative effect is countered by the fact that the trees cut are used as fuel in industries such as the tea factories in Kenya.