In last decades the importance of Foreign Direct Investments (FDI) has increased significantly due to globalization process, which offers huge opportunities for mostly developing countries to reach faster economic growth through trade and investment. FDI assists foreign investors in utilizing their assets and resources more efficiently as well as host countries in acquisition of better technologies and getting involved in international production and trade networks (Athukorala, 2003).

Developing countries have started to see FDI as a source of economic development and modernisation, income growth and employment. These nations have liberalised their investment regimes and followed other policies to attract more FDI. They have attempted to find the ways of pursuing those domestic policies that will allow them to drive maximum benefits from multinational enterprise presence in the domestic economy (OECD, 2002).

The aim of this study is to analyze the impact of FDI on the economy of host countries. The first part of the work will be addressed to the relationship between foreign investments and the economic growth of the host nations. The study will answer the question why some countries benefit from FDI more than other countries, and what these governments should realize in order to maximize their benefits from the presence of foreign firms.

The following parts will be devoted to more certain issues, such as positive and negative effects of FDI in the host countries. Since there is a broad literature on the positive impacts of foreign investments, the main focus in this work is emphasized on the negative impacts. The study shows that although MNEs bring many benefits to host countries and the governments are trying to attract more and more investments, the negative effects of FDI in the economy of host countries should not be neglected. Any indifference to these issues may result in negative spillover effects, balance of payment deficits, dual economy, pollution and etc.

Brief information about the negative impacts of FDI, especially, Dutch Disease effects, on the economy of Azerbaijan is also given at the end of the study in order to bring a practical example. This part is also provided with charts for more visual description of the effects.

FDI and Economic Growth