1. FOREIN DIRECT INVESTMENT (FDI) THEORY
1.3. Roles of foreign direct investment
1.3.2. Impact of FDI on investment receiving country
First, the additional investment funds for social and economic development:
The British economist Roy Harrod (1940) and Americans economist Domar Evsey (1940) proved that GDP growth depends on investment, as follows:
ICOR =
GDP I
Where:
ICOR: investment ratio I: total social investment
GDP: the increase level of total domestic product
According to the above formula, if the investment ratio is constant, GDP growth rate will depend on the total social investment. Therefore, FDI contribute to
the increase in capital investment, technology ... and promote economic growth and development.
Second, technology transfer, economic management experience:
Foreign direct investment is an important resource for the development of technological capabilities of the host country. FDI accompanies by available technologies transfer from outside, develop technological capability of the research facilities and application in the country, and stimulate local business enterprises to invest innovation technology to create products which are capable of competing with FDI. In addition, the management model and the modern business methods used in FDI domestic firms promote innovation in management thinking and acquire advanced management experience.
Third, create jobs, raise living standards and quality of human resources:
FDI projects create jobs by attracting the host country's labor working directly in the FDI and create indirectly jobs by promoting the activities of related services.
FDI project invests to produce and distribute pharmaceuticals, medical devices and process quality food in the host country; that contribute to improving health and nutrition for people of the local country.
In addition, foreign investors provide financial grants or directly open vocational training classes, or send human resources for abroad training… Thus, they
play an important contribution to development of vocational education, and improve management capacity for labors in the investment-receiving countries.
Fourth, expand markets, promote exports of goods:
FDI enterprises contribute significantly in enhancing the export capacity, markets expanding abroad. Through the cooperation with foreign investors, host countries have opportunities to enter world market, where investors have considerable
position (because most investors are transnational companies that have consumption networks in many countries around the world).
Fifth, promote economic restructuring:
FDI projects focus mainly on investment in industries and services. In particular, FDI projects in developing countries form new industry and services that contribute to restructuring the economics by increasing the proportion of industry and services in the economy structure, associated with the change of technological structure, product structure, labor structure, the structure of the territory ... in accordance with the needs of social and economic development of countries receiving investment.
Sixth, contribute to increasing national budget and improving trade balances:
FDI enterprises contribute to increasing national budget through direct taxes and other taxing charges. In addition, FDI inflows into the investment receiving country and indirect foreign currency through tourism, and payment of products and services provided by the host countries will improve the current account balance, international balance of payment.
b) Negative impacts
First, the phenomenon of "transfer pricing" is quite common in foreign direct investment:
The price transition behavior has negative impact on the economy, causing huge losses to the State, distorting the business environment, creating unequal and detrimental pressure to the good investors who follow right commitment; and lessen effective management of the State in the implementation of the investment policy for economical and social development. This is also one of the causes of trade gap
increased do to the greater use of foreign currency for raw material importation than foreign currency gained from product exportation.
Second, causing some imbalance and instability in the investment:
The highest goal of investors is profit. Investors are interested in the project having a high rate of return. In contrast, the projects, that are important for people's needs and welfare, but provide low or no profits, will be difficult to attract FDI.
The foreign investors often invest in the sector, areas which are not coincident with the objectives of the host country in attracting FDI. If there are not effective mechanisms and effective planning, it will lead to investment inefficient and rampant status of investment, overexploited of natural resources. Foreign investors also make distortion of economic structure, slow improvingment, this might build overall risk of destabilizing socio-economic life of countries such as FDI inflows abruptly withdrawn, mass dismissing of workers...
Third, causing negative result of labor and finance in the investment receiving country:
The international investors are the most experienced and savvy in business, so in many cases the host country will bear much disadvantage. In addition, the host country may also suffer from "brain drain" because FDI projects often attract good managers due to good income or good and highly professional working environment.
Due to the presence of FDI firms that make the labor force, especially skilled workers move from local economical sector to FDI sectors with higher income levels.
Moreover, foreign investors will bring benefits to in their country from investment activities, tax exemption and also from other activities. Many foreign investors still have tax arrears, bank lending in the country in large quantities and then have secretly fled out of the host country.
Fourth, may be introduced by the outdated technology:
The foreign investors take advantage of weaknesses in management expertise and technology of the host country. They might introduce the outdated technology with expensive prices, causing huge waste for removal, replacement or other consequences later. Recently in Vietnam, there have been many projects bringing obsolete equipment and technologies, it affects seriously to the environmental and community benefits to the host country but foreign investors remain gain high benefits.
Fifth, increase the risk of bankruptcy of local economy and traditional industries, increase risk of competitive inequality.
Status of labor disputes in the FDI sector is inevitable, especially in the time of starting a new business activity, or in the certain time when business activity has met difficulty. Some employers pay for workers in the minimum salary, require overtime working, the salary is not enough to reproduce labor power, arising conflicts between employers and employees, leading to strikes, strike or production stagnation.
Sixth, it is losing more jobs from the traditional manufacturing industries and being not properly respected to training for employees:
The foreign investors have created many jobs for the host country, especially for developing countries like Vietnam, where have the young population and abundant labor source; the creation of work to workers with a stable income is extremely important. In fact, FDI has created million workers directly and indirectly in recent years. Besides, FDI activity has also caused much loss of the agricultural land, leading the loss of many jobs in the traditional sectors. With goal of maximizing profits and minimizing costs, foreign investors still favor exploitation and use
seasonally of cheap and less training labor bur pay less attention to the training and use of skilled manpower who can work for long time for investors.
Seventh, negatve impact on the environment and natural resource over- exploitation:
It can be said one of the most negative effects of FDI on host countries is the impact on the environment. Especially, the situation of "pollution export" from developed countries to developing countries through increased FDI. The developing countries are in danger of becoming the country having high "imported" pollution, most of China, India, Vietnam…
Eighth, it is the risk of money laundering:
FDI can be a convenient channel for money laundering organizations. The illegal organizations can conduct investments abroad in the form of 100% foreign capital, which not to act any legal business, but legalized the illegal payments. In particular, in the country which has weak inspection, monitoring, accounting and customer underdeveloped leaning systems, the use of unofficial cash and its flows are high.