Foreign direct investment

Firstly, what is foreign direct investment (FDI)?
It is the purchase of physical assets or a significant amount of the ownership of a company in another country to gain a measure of management control. Firms that make FDIs typically have a significant degree of influence and control over the company in which the investment is made. Open economies with skilled workforces and good growth prospects attract large amounts of FDIs.
China is an example of the success of FDI. From 1978 to 2005 China has an economic growth rate of 9% on average. This is essentially down to the adoption of initiatives encouraging inward FDI. So obviously economies can be successful by accepting FDI, there are many reasons why China encouraged FDI. FDI offers the ability to obtain overseas resources, increase access to return markets, increase local capital markets and drive economic growth. The final advantage of FDI has clearly resonated in China! In the case of China, one of the biggest gains from FDI is the expansion of China's manufacturing exports. The numbers speak for themselves, in 1980 China was ranked 26th in the world for exports, and in 2005 China was ranked 3rd!


It all seems like nothing can go wrong with foreign direct investment in developing economies but examining further there are negative impacts.


FDI can create adverse effects on local competition because of the spending power of MNCs. Also the government will usually give in to the requests of the MNC, loosing national autonomy. There are other contextual factors such as environmental damage, human rights implications and corruption. In my opinion the biggest losers in foreign direct investment are the domestic small businesses. There are people that argue that FDI does not positively affect the host countries and they state that, for the purpose of long-term economic growth, it may be better to protect domestic infant industries rather than rely on foreign capital.


On the other hand, there have been studies that show that MNCs can be good for domestic business and that FDI benefits domestic companies in the same sector and in the upstream sectors initially, before the MNCs become dominant. My question is what happens to the domestic businesses when the MNCs do become dominant?
Perhaps, these are the stakeholders that the government and the MNCs should consider protecting in someway?