The Effects of Foreign Direct Investment

FDI involves the transfer of financial capital, technology and other skills (managerial, marketing, accounting, and so on) as we have seen so far. This process gives rise to costs and benefits for the countries involved: the investing country (the source of the investment) and the host country (the recipient or the destination of the investment). It is not clear, however, what costs are borne and what benefits are enjoyed by the two countries, at least not quantitatively. There is even a fundamental disagreement on what constitutes the costs and benefits of FDI from the perspectives of the two countries. This disagreement is indicated by the big gap between those holding proglobalization, free-market views, and those with anti-globalization, anti-market views. Moreover, the division of welfare gains between the host country and the investing country does not only depend on given market prices, but also on the relative strength of the two countries in bargaining over the terms of the agreement governing a particular FDI project. Nevertheless, one country’s losses are not necessarily the other country’s gains. Kindleberger (1969), for example, argues that the relationship arising from the FDI process is not a zero-sum game.