o Securing stable foreign currency instrument
– The foreign investment ensures the stable introduction of international capital without additional debt burden
▶ Since FDI aims at generating business profits from the long-term business through securement of the management rights, it is more stable than the pure nature of financing
– In the situation where the domestic capital does not afford, M&A by the foreign investment plays a positive role in the restructuring of the domestic firms.
o Economic effects of foreign investment
– The overall inflow of capital itself creates added values through the increase of industry production and promotes the economic growth through economy-wide productivity improvement, technology transfer, increased employment, and expansion of exports.
– Effect of increasing economic competitiveness
▶ It promotes competition within markets to improve effectiveness of domestic economy structure and increase consumer benefits through price decline.
– Technology transfer and ripple effects
▶ The direct technology transfer into the subsidy in the nation by the foreign parent company or employment of researchers focusing on the foreign investment subsidy which received technology transfer spreads to other domestic companies through various channel.
– Trade balance effect: Concurrent effect of the positive (+) and negative effects
▶ Local production by the direct investment brings in effects of import substitution, which improves the trade balance, but may worsen the trade balance by resulting in import increase from manufacturing factors such as raw materials/ parts one the other hand.
▶ Production base type foreign investment improves the trade balance whereas the market approach foreign investment aiming at the domestic sales may affect differently depending on the degree of finished goods substitution and the overseas procurement of intermediary goods.
▶ The capital inflow form the host country improves the capital balance nut the payment of royalty, transfer of gains deteriorates the invisible balance.
– Employment effects
▶ The direct employment effect through local labor employment, the employment expansion of local companies for intermediary/ raw material supply by the foreign-invested company, distribution of finished goods by the foreign-invested company require the increase of employment.
▶ However, if the local companies which have used labor-intensive manufacturing methods are replaced by the capital-intensive foreign-invested company, the employment may be reduced.
