The unprecedented growth of multinationals is due to the concept of globalisation which has no boundaries or limits. Usually within country’s economy there are flows of goods, capital and technology. This leads to high competition in the industry and naturally companies tend to expand their business in order to survive in the global arena. The countries use Foreign Direct Investment as a key to internationalise their business. In order to understand the full meaning of FDI, let us see the definition. FDI is defined as “the acquisition abroad of physical assets, such as plant and equipment, with operational control ultimately residing with the parent company in the home country” (Buckley, p.35, 1996).In the past 25 years, FDI is growing at a much faster rate than trade and both of these have grown faster than world output (Kozul-Wright and Rowthorn, 1998). There are many factors contributing to the development of FDI. Some of them are Internet, technological advancement, flexible rules and regulations of the country and lesser communication costs. FDI stimulates competition, capital, technological and managerial skills which has a positive effect on both host and home country’s economic growth. The importance given to FDI by other country is astounding. One such example is US which has a separate department called ‘Bureau of Economic Analysis’. The department monitors FDI inflows and outflows and introduce FDI attraction schemes for successful results. (Graham & Spaulding, 2005).This essay analyses various costs and benefits to home country and host country with suitable evidences.

Costs and Benefits

Let us discuss the costs and benefits of FDI to both home countries and host countries.

Benefits of FDI to the host country

Hill (2005) suggested that there are three main benefits to the host country derived out of FDI. They are resource transfer effects, employment effects and balance of payment effects. Whenever a company invests in a foreign firm, the resources are capital, technology and managerial skills. In terms of capital, the host country will have a higher financial status than the home country. The change in technology and managerial skills will have a drastic effect on the operations carried out by the company. In the host country due to FDI, it creates many employment opportunities through which the citizens of that particular country would be benefited. The balance of payments keeps tracks of FDI inflow and outflows through two types of accounts, current account and capital account. “The current account is a record of a country’s export and import of goods” (Hill, 2005) and the capital account maintain purchase or sale details of assets by the country. By using FDI, the country can achieve a current account surplus (where exports are greater than imports) and reduce current account deficit (where imports are greater than exports). (Hill, 2005)

Costs of FDI to the host country

The negative effects are termed as ‘costs’. There are also significant effects which affects the host country. When a foreign firm establishes with the superior technological skills which can produce quality items at cheaper rates, it adversely affects the domestic producers. Balance of payments are also affected by inward FDI by two sources. When there is a initial capital inflow there must be subsequent capital outflow and this will be recorded as debits on capital account. The second source is due to import of goods from other countries which will be recorded as debits in current account. The foreign firm can alter the economic stability of a country as they will be focussing only on the profit. Eventually all the inhabitants of the country will have an emotional outbreak to apparent loss of national sovereignty. (Hill, 2005)