We can all agree that Foreign Direct Investment (FDI) has proved to be resilient during financial crises. This resilience could lead many developing countries to prefer FDI over other forms of capital flows, adding to a trend that has been in existence for years now.
But not everyone understands the foreign direct investment advantage that makes it worth leveraging. With that in mind, is the preference for FDI over other forms of private capital inflows justified?
This blog post will help shed some light on this issue by reviewing recent theoretical and empirical works on its impact on developing countries’ investments and growth. Read on to find out.
The Case for Free Capital Flows
It is quite evident that economists seem to be favoring the free flow of capital across national borders. And this can be attributed to the sheer fact that it allows capital to seek out the highest rate of return. Keep in mind unrestricted capital flows may also offer several other benefits.
With that in mind, it is worth noting that Foreign Direct Investment (FDI) allows the transfer for technology. This is mostly the case in the form of new varieties of capital inputs that can’t be attained through financial investments of trade in goods and services.
FDI Versus Other Flows
Regardless of the strong supporting evidence for the benefits of free capital flows, the conventional wisdom now seems to be that many private capital flows pose a serious risk. Things tend to be somewhat different with Foreign Direct Investment considering it is regarded as ‘good cholesterol.’
A key foreign direct investment advantage worth noting is the though to be ‘bolted down and can’t leave so easily at the first sign of trouble.’ Unlike short-term debt, direct investments in a country are immediately repriced in the event of a crisis.
There’s more you should know regarding foreign direct investment advantage to developing countries than what is merely included in this quick guide. For this reason, you should take it upon yourself to do a bit of research here and there to better understand what lies ahead.
