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Why Does Foreign Direct Investment Matter to a Country?

London, Tuesday 19 December 2023

Foreign direct investment (FDI) has become an essential component of economic growth and development for nations in the modern, globalised world.

By Angelos Tsigkopoulos

Founder & CEO, Diorasis Group

Keynote Speaker at The International Negotiations Conference, NegotiCON 2024

Why Does Foreign Direct Investment Matter to a Country?


Foreign direct investment (FDI) has become an essential component of economic growth and development for nations in the modern, globalised world. The term foreign direct investment (FDI) describes the financial contributions made by people or businesses from one nation to another in order to start up operations or buy assets.


Yet, why is FDI important to a country? What effect does it have on the employment prospects, growth, and development of a country? Let’s highlight the relationship between FDI and a country's overall prosperity, in order to provide you with the context of your next FDI considerations.  


The Relationship of FDI to Growth and Development


An essential component of the economic growth of a country is foreign direct investment. New technologies, commercial concepts, and managerial know-how are brought to a country's economy by foreign investors. Increased output, innovation, and productivity levels are a result of this knowledge and capital influx in the host nation.


Moreover, FDI frequently results in the transfer of cutting-edge technologies and expertise, which helps domestic firms. This technology transfer increases the overall efficiency and competitiveness of local enterprises. Consequently, increased productivity in the host nation's economy propels long-term sustainable growth.


Employment Opportunities Brought by FDI


Job opportunities are one of the major benefits of foreign direct investment (FDI) for a nation. The creation of new companies and the growth of current ones are frequently the results of foreign direct investment. These projects necessitate a trained labour force, creating jobs for locals in the process.


Furthermore, acquiring knowledge and skills from foreign investors might help the host nation's human capital improve. Employees in the area are exposed to cutting edge corporate techniques, fostering an environment that fosters both professional and personal development.


Additionally, FDI has the potential to drive the growth of supply networks and linked businesses. Multinational corporations frequently need assistance from local suppliers when they establish operations, which generates indirect job opportunities across a range of industries.



Why do Countries Put Effort in Attracting Foreign Investors?


Why do countries actively seek out foreign direct investment may be on your mind. Well, there are a few of them:


 Capital Inflow


FDI provides a nation with much-needed capital. This financial infusion promotes infrastructure development and fills the investment gap, which in turn boosts economic growth.


Market Access


Well-established trade connections, distribution networks, and market expertise are frequently brought by foreign investors. For domestic companies, this may provide new market prospects and access to international markets.


Technology Transfer


With foreign direct investment (FDI), industrialised countries frequently transfer their cutting-edge technology, R&D capacities, to the recipient nation. In addition to giving regional companies a competitive edge, this promotes creativity and technical advancement.


Employment Creation


Foreign direct investment (FDI) lowers unemployment rates and raises living standards in the host nation by generating both direct and indirect employment possibilities.


Enhancement of Knowledge and Skills


The host nation can gain from the experience, best practices, and managerial abilities of foreign investors through FDI. The competitiveness and general capabilities of domestic enterprises are enhanced by this knowledge exchange.


To sum up, foreign direct investment is essential to a nation's expansion, wealth, and progress. Beyond just adding money to an economy, its effects include promoting innovation, technological transfer, the creation of jobs, and market development. Countries can benefit from international resources and experience through FDI in order to attain sustainable economic growth and enhance the quality of life for their population.



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