Foreign Direct Investment


Foreign Direct Investment (FDI) being an investment carried out in a business by investors from some other countries whereby the particular foreign investor has control over the company purchased is associated with several benefits. A company that makes foreign direct investments is often referred to as the multinational corporations or the multinational enterprises. In case a multinational corporation makes a direct investment whereby he/she creates a new foreign enterprise, this is referred as the green investment while through the acquisition of a foreign firm is known as the brownfield investment. According to various ratings FDI has the potential in bringing environmental benefits when it comes to the host economies which is through the dissemination of good the technology as well as the good practices within the Multinational Enterprises (MNEs) which also through their subsequent spillovers to the domestic firms.

 Benefits of Foreign Direct Investment.

 Some of the benefits associated with the foreign direct investments in terms democracy promotion and environment are as follows:

  1. An introduction of environmentally friendly technology.

FDI plays a significant role when it comes to the technology development of a particular country especially where the investment is being carried out (Alfaro 2004, 95)3.

There are definite technological effects resulting from the use of environmentally friendly technology. Usually, there is a significant potential for the technological diffusion from the mining investment. The reason being that mines tends to be essentially low-technology earth moving operations, especially where there is involvement of open pit operations. It helps create a more conducive environment to an investor as well as benefiting the local industry of a state. This benefit is commonly applicable to the countries that are developing. When it comes to most of the countries that are economically developing, foreign direct investments tend to be significant external sources (Edwards 1992)4.

Considering a country like the South Africa where the mining industry is one of the most established in the world, much of the mining technology used currently has already been produced locally thus the technological effects is likely to be small in mining.

Since the potential positive spillover is far more liable to take place in the mineral processing and the finished product manufacture, there is an opportunity for the foreign investors to introduce an environmentally friendly technology. This, in turn, leads to developing the technology.

  1. Positive Regulatory and Policy Effects By The Government.

Normally positive governing or the policy effects result from the potential improvement in regulation (Jaffe 2002, 60)53

Taking an example of a country like the South Africa, it has an adamant law and also the institutions with a very long effective supervision of the mining industry with the assistance of the government willingness to proceed the potential economic benefits when it come to the presence of doubts regarding the environmental impacts of the mining development. It is thus very unlikely for the foreign direct investment in the mining sector to have a negative policy or the regulatory effects.

Also taking an example of a country like Ghana, it is clear that some mining operations that are financed by the FDI, especially where there is involvement of the IFC financing, there is applying of environmental standards in advance of the ones required by the government.

  1. Positive structural effects.

Normally positive structural effects occur when the existing targeting foreign direct investment (FDI) is involving environmental pressure that is less than the previous targets, this may include a shift from the manufacturing to the services (Coyne Sr 2012)6. Taking, for example, a mining industry, the main structural effect that may result is the replacement of artisanal as well as the small scale mining by the large-scale projects. FDI helps in providing a source of capital, generating new job opportunities, boosting economic growth, and complementing private domestic investment in the host countries (Biglaiser 2006, 60) 7

  1. Development of the domestic industries.

The technological externalities and the demonstration effects of the economy result in a positive outcome on the local firm’s total factor together on their propensity to export (Markusen 1999, 345)8. The spillover channels arising from the FDI helps improve the efficiency that may involve copying of technologies of the foreign affiliates that is operating in the local market that may be through hiring trained workers by the affiliates or through observation. Normally the development of the domestic industry is achieved through the direct transfer of knowledge that is from the foreign customers to the local supplies.

  1. Increasing the demand for the environmental quality.

Foreign direct investment in a particular country leads to increased demand for the environmental quality that simultaneously increases the level of income (Lambin 2011, 3468)9. Mainly as the Foreign Direct Investment increases the level of the income, it directly contributes to a rise in environmental demand. To increase this environmental demand, a democratic government requires coming up with rules and regulations that are governing the FDI by the foreign investors in a way that is attractive and seems friendly.

In conclusion, foreign direct investment is highly associated with some benefits regarding democracy promotion and the environment.

These benefits may include the introduction of environmentally friendly technology, positive structural impacts, and Positive regulatory and policy effects by the government, development of domestic industries, and increasing the demand for the environmental quality.

Government policies due to the democracy of a country have effects on FDI because of the agreements between a government that allow investors from a particular country with an aim of gaining entry into the market (Busse 2007, 405)10. Also, FDI also has some other benefits like ensuring easy access to the markets and reducing the production cost (Helpman 2003)11. It acts as an effective way when it comes to entering a foreign market. Usually, some countries tend to have an extreme limit when it comes to the companies accessing their domestic markets. For reducing the cost of production, FDI serves as a means that help reduces the production cost if it happens that the market is cheaper, and also the regulations are less restrictive when it comes to targeting market functions that are determined by the government (JANAKIRAM 2011)12.

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