Foreign investment flows

1. It is usually carried out by multinational companies such as Toyota or Samsung, covered in section 11.5.3.
2. It differs from portfolio investment, which is buying shares or bonds without a controlling interest.

Forms of FDI

1. Greenfield investment builds new facilities, for example Toyota opening a new car plant in India, which directly adds to the capital stock.
2. Mergers and acquisitions involve buying an existing foreign business, which transfers ownership rather than creating new capacity.

Consequences of FDI

1. FDI adds to the host's capital stock, helping to fill a savings gap and shift the PPC outward.
2. It transfers technology and management skills that raise productivity across the economy.
3. It creates jobs and incomes and can generate spillovers to local suppliers who learn new standards.
4. Output sold abroad can improve the current account and earn foreign exchange.
5. However, profits may be repatriated to the home country rather than reinvested, which drains the host's foreign exchange.
6. Key industries may pass into foreign control, reducing domestic economic sovereignty.
7. Foreign firms may crowd out local producers or exploit weak labour and environmental rules.
8. Heavy reliance on foreign investors can create dependence and leave the economy vulnerable if they withdraw.

Does FDI accelerate development?

1. It can, because FDI fills the savings gap, adds to the capital stock and transfers technology and management skills that raise productivity, while greenfield projects create jobs and export earnings; inflows into Vietnam's electronics factories and into telecoms and mining across sub-Saharan Africa have funded capacity that domestic saving alone could not.
2. But the net gain shrinks when profits are repatriated rather than reinvested, when transfer pricing erodes host tax revenue, and when key industries pass into foreign control, leaving the economy dependent on investors who can exit quickly.
3. The size of the gain depends on the type of FDI, since stable greenfield investment builds new capacity while a merger or acquisition may only change ownership, and on how much is reinvested and taxed in the host economy.
4. On balance, FDI is more likely to raise long-run living standards where it is greenfield, well regulated and linked to local suppliers, and less so where it is lightly taxed, enclave-based and quick to withdraw.