The business world is changing because new business strategies appear, and they come in different forms. As a result, many business models and operation methods have emerged to diversify the market and mitigate stiff competition. The paper has chosen Foreign Direct Investment (FDI), as it is among the models that many companies have realized can result in the desired profits and maximized market opportunities. Specifically, it refers to the practice of undertaking cross-border investments by a certain company in another country to control interests and other ventures. Furthermore, FDI is viewed as a reliable business strategy that companies can opt for since it benefits the host country in terms of increased employment opportunities, boosted manufacturing, developing human resources, utilized local resources, increased exportation, but with minor cons, including the disappearance of local small firms, and cultural erosion. Here on our website you will find original and unique essay sample for students.
Background of the Foreign Direct Investment Benefits to the Host Country
This business technique should be complimented, as it is tied to numerous advantages in the host country. Still, it is common sense that when a company starts to operate in a foreign nation, it will benefit because new business methods will manifest. In this case, it would be right to admit that the host nation will help much because it will tap into the new business technologies and norms that the foreign firm has brought to that land, as Gochero and Boopen (2020) argue. Thus, the benefits of foreign direct investment find their background for this theory and existing literature.
The Advantages of Foreign Direct Investment on the Host Country
Increased employment rates and opportunities
Whenever a new company opens its branch in another country, a higher likelihood exists that the unemployed locals will find new opportunities. In other words, these foreign companies come to that country to begin new operations and extension of the parent company’s units (Verbeke, 2009, p. 4). For instance, an investor/company based in the United States of America can opt to start operating in China, which will create new job chances to the locality where such a business will be implemented.
Job opportunities are bound to arise because of the created additional avenues, demand for labor, and human capital. Ideally, a firm cannot begin its operations in another country and fails to search for local labor and pre-requisites needed for the start-up business. For instance, scholars have supported this view by suggesting that any new business venture in a foreign nation must accompany additional job opportunities for the locals (Moura and Forte, 2019, p. 3). Based on this thought/suggestion, it would be right to admit that the host country will always benefit from such a venture.
The increased job opportunities that arise from the coming of the new company are linked to the increased revenue generated in the host country. Anytime a business has begun to employ other people, it will mean that the tax collected will increase, leading to the benefits in the raised revenue levels (Kastratović, 2020). As a result, the host country’s economy will advance, judging the additional revenues pumped into the economy.
Boosted manufacturing sector
Foreign companies yearn to open branches in places where growth is vivid. These investors are driven by the notion that opening an extension of their business in another country should be accompanied by the availability of manufacturing opportunities. Moreover, it would be a trivial and unreliable decision if an investor may fail to think in this direction. Therefore, scholars have maintained that the availability of manufacturing guides foreign direct investment. Thus, such a business should produce materials and goods that utilize the underlying resources (Selma, 2013, p. 27). Indeed, the host country will always benefit from this type of business, as its manufacturing sector will be boosted.
The discussions about the improved manufacturing sector of the host country is a matter that has passed the obstacles, which other types of operation and methods have posited. The locally available resources are the main reason for improving this particular sector (Geoergeta 2014, p. 163). It could be noted that many resources are pumped into this firm whenever a business opens up in the host country’s interior side. Later, the host country will benefit since its manufacturing sector will have begun to receive new operation strategies, which it will borrow and use in other sectors.
The emergence of new skills and competencies
The start-ups are associated with skills considered as top-notch, as the concerned investors are not hoping to embark on trials and errors. In this case, a higher likelihood exists that the newly built company will come with qualified employees to the host country. At no point can a company leave its home country to go and start a new business in a different country, with less skilled employees (Van et al., 2005, p. 80). By basing the argument on this aspect, foreign direct investment is a perfect opportunity for the host country to receive new skills and competencies.
By operating in a different country, the foreign company will prove to the host country that its professionals are the best. Another aspect will arise through this quest to prove that the foreign company is the best alternative. The local firms will begin to benchmark from the newly Setup Company, leading to sharing skills, knowledge, and competencies (Daniels et al., 2004, p. 8). The host country will have started to benefit from this foreign company’s new skills, as it will use them to operate its local industries.
The emergence of new skills and knowledge in the host country proves that foreign direct investment can capitalize on the existing skills. Besides, it is fitting to suggest that this business arrangement should be encouraged since its ultimate result in the host country’s economy is commendable (Selma, 2013, p. 27). Still, facts have proven that foreign direct investment is a better business technique, as noted from its influence on the host country’s economy.
The current world has reached the level that foreign direct investment should be the norm. Over the news and other reliable data sources, it is common to come across business people and other companies admitting that foreign direct investment is the way to go (Kastratović, 2020). According to this group, it is important to utilize the newly adopted skills in a country since that opportunity will grant the host country an avenue to grow its economy to the level that its local crafts and competencies would not have reached.
Improved business operations arising from the new technology and innovations
Foreign direct investment businesses are known for their superior technology. It means that before an investor starts to think of going global and controlling the interest in another country, they will have ensured that the intended technology is beyond the host country’s reach. It requires a business to strategize before venturing into a foreign direct investment, and this prior evaluation focuses on technology (Van et al., 2005, p. 4). Thus, foreign direct investment business arrangement is a platform that the host country can utilize to advance its technology.
After the foreign company has brought new technical skills, methods, and machines, the local companies will leeway to use these new norms. Besides, it is possible to collaborate with the foreign company, as it always wants to share its technology with the host country’s firms. Because of this opportunity, it will be possible for the host country’s technology to be updated, as it will borrow ideas from foreign companies.
Over the years, the issue of foreign direct investment being part of the host country’s economic growth has been supported by many scholars, opinion experts, and other prominent business people. It would be impossible for the foreign company to operate in another country, to remain independent. As such, this existing interdependence between the host country and the foreign company acts as the ground for borrowing technology.
The essence of having new technology in a foreign country is to share it with the local companies. This view tries to explain the technology diffusion mechanism, in which this concept refers to spreading the newly adopted technology and innovation to the other economic sectors (Kastratović, 2020). For example, if the company dealt with metals, the host country could imitate the same technology and apply it in the motor vehicle industry. The host country will have benefited from a technological, natural diffusion approach and applications from this avenue.
Increased income on the locals
The setup that leads to the employment of people will always reflect on their increased income levels. In the same way, foreign direct investment is among the business practices that come with lucrative bonuses and wages, in that the new company seeks to attract the locals. It means the foreign company will be paying its workers slightly above what the local firms pay (Silva and Porte, 2018, p. 3). By arguing from this point, it is clear that the income of the local employees will rise, and this outcome is bound to happen. Therefore, the host country’s citizens will have perfect opportunities to add more income to their pockets.
Foreign direct investment should be treated as the right and admirable avenue where the host country can benefit, in addition to its citizens. In this regard, this notion tries to bring sense into the discussion by referring to the associated benefits of increased income. For instance, the immediate outcome of this factor would be higher purchasing power from the locals (Gochero and Boopen, 2020). According to the economic perspective, this is true since additional income will reflect increased purchasing of more goods.
The host country will then benefit from the increased purchasing power because inflation will be reduced. Certainly, a country can experience a higher flow of money in the economy, in which the households have extra to spend. In that case, it means the host country will stay away from inflation because reduced purchasing power contributes to this factor (Georgeta, 2014, p. 164). Thus, it is good to applaud this business practice, resulting in lowered inflation rates.
Developed human resource
Every business will thrive if the human resource is developed to reach the optimum business level. Still, it can be suggested that without adequate human capital, a country may not meet the proposed economic goals and millenniums because it is through a human resource that the skills, competencies, and knowledge will be tapped. Moreover, the host country has higher success chances because the foreign company trains the local workers (Silva and Porte, 2018, p. 13). Notably, any rational person would admit that foreign direct investment benefits the host country.
The foreign firms have often been linked to operations, including mentorship programs, awareness of some technology’s benefits, and other related concepts. These companies choose to conduct the human capital development programs to appreciate the host country to operate on its soil (Verbeke, 2009, p. 26). Similarly, it has been deduced that foreign direct investment happens appropriately that the host country can become part of the advancing technology. For instance, a new factory will adopt the latest technology and innovation, improving human resources.
Transformation of the backward areas
Foreign companies always go for the interior parts of the host country, as they believe that such places will propel the business’s pick up and create a better ground for success. However, in reality, setting up a company in the interior part of a country implies that access to local labor and raw materials would no longer be a challenge (Gochero and Boopen, 2020). For this reason, many foreign companies have shifted to opening their branches in the backward areas, resulting in the growth of these places.
A business that has opened up its operations or part of its functions in an interior area is bound to prosper and access the required materials at cheaper costs. After the investors realized this avenue, they began to go where the locals needed employment to develop their communities. Consequently, it can also be admitted that foreign companies will start to practice corporate social responsibility. This business ethics is tied to the outcomes witnessed in nearby communities’ growth and development (Moura and Porte, 2013, p. 13). Therefore, it will be obvious that the backward areas within the host country will develop, implying that the concerned nation will have benefited.
Any transformed area will reflect on the economy’s development and expansion. For example, experts argue that a nation that enjoys communities’ growth, and advancement, will have changes in economic activities, whereby new businesses and kiosks will be opened (Daniels et al., 2004, p. 26). In light of this factor, it will be easier for the host country’s economy to advance because of the revenues it will begin to collect from these areas.
The Arguments against Foreign Direct Investment
Not every good business practice will lack its cons, and FDI is not excluded. However, some scholars, experts, and businesspeople have opposed this business strategy by basing their arguments on various outcomes. This paper will delve into such issues without any bias since opinions also count.
The disappearance of small-scale firms
It could not be far from the truth that some small firms in the host country may be denied the opportunity to grow and attain their market dominance. Openly, it may be right to suggest that certain foreign companies come with an already established market, meaning that the younger companies’ customers will be driven away with the new wave (Georgeta, 2014, p. 162). Hence, the outcome from this force would be a lack of market for the goods, forcing the small businesses to shut down their operations.
A business that has begun operating in a new country will always come with new organizational cultures, ethics, and beliefs. When the locals start to employ, they will find it hard to adapt to the new values and other cultural practices from the parent company’s country. Likewise, people tend to strive to force themselves into fitting in contemporary cultures at the expense of the mainstream ones. Therefore, cultural erosion is a disadvantage that comes with foreign direct investment. Agreeably, the school of thought is right, as noted from this cultural consequence.
Cultural erosion is another con that arises from foreign direct investment because it challenges humans to be part of the change. Generally, many companies that have chosen to open branches in foreign nations have higher possibilities that their cultures differ (Verbeke, 2009, p. 46). By arguing from this viewpoint, the host country may lose its native and mainstream culture if it fails to intervene in the foreign company’s business ethics and practices, which they have imposed on the locals.
The exploitation of the markets
These large multinationals are associated with commanding a larger market base. In other words, when these investors come to a foreign nation, they expect to dominate a certain market. Mostly, this dominance has been linked to unethical business practices. For instance, some investors employ secret people to exploit the local companies by offering unregulated incentives to the customers (Van et al., 2005, p. 62). Vividly, it would be misleading to disregard that foreign direct investment initiates market exploitation since all indications have been highlighted. However, despite the enumerated foreign direct investment cons, the paper’s findings have proven pros and cons; thus, the host country will always benefit.
Foreign direct investment has proven that the business world is advancing, and many opportunities exist to be utilized. Investors that have gone this direction have confirmed that this business arrangement is worth undertaking, as it leads to numerous benefits to the same companies, locals, and the host country. In addition, it has been deduced that FDI outlines more advantages than disadvantages, as indicated by increased employment opportunities, boosted manufacturing, and development of the backward areas. Comparatively, its cons have included the disappearance of the small local firms, market exploitation, and cultural erosion. Hence, it is right to agree that foreign direct investment benefits the host country. Overall, investors should find better ways to improve this practice to mitigate the highlighted weaknesses.
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