Importance of International Investment
International investment is central to the modern economy. The specific "importance" of investing abroad, especially in the developing world, is a more complex understanding. The importance of foreign direct investment (FDI) lies in what that investment can do to increase efficiency and change the lives of those living in the undeveloped world.
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History
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The rise of the multinational corporate (MNC) comes from the American victory in World War II. The U.S. was in a position to dictate economic terms to the world, and these terms were based on open markets and free trade. FDI developed in its modern form from this. Its modern form is private, contractual investment throughout the world.
Types
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Seen from the point of view of the developing world, these states require new infusions of capital to jump-start their own development. FDI helps do this through the "spillover" effect, where foreign skills and technology seep into the local market. FDI raises employment and revenue, as well as forcing local businesses to update, adapt or die.
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Features
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From the point of view of the developed world, international investment takes its importance from products made abroad, which are cheaper to produce than at home. Some approaches to FDI hold that this helps the home economy through cheaper products and higher standards of living. FDI then, from this point of view, is about making products demanded at home at the most efficient and cheapest rate.
Benefits
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The importance of FDI for the developing world lies in its ability to bring the local economy into the modern world. Technology and skills can transfer into the local economy while putting local talent to the best use, by bringing them into the most modern and efficient production and management methods. An entirely new cadre of highly skilled labor can be created through FDI. FDI creates a "win-win" situation, where the developed world receives cheaper products, and the local economy gets a new infusion of capital and skills. From the point of view of the MNC, the firm now has a leg up on its competition by using raw materials and cheaper labor.
Effects
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One highly important effect of FDI on the local economy is to break down locally created monopolies. FDI injects new ideas and competition into the local economy, forcing others to compete by modernizing their management apparatus. FDI can, in these cases, destroy entrenched monopolies. Equally important is the fact that to attract FDI, countries must modernize infrastructure and eliminate corruption as best they can so as to be an attractive destination for investment. States that refuse to improve their performance run the risk of being left behind. FDI can be the catalyst for needed domestic reform.
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