FDI AND THE EFFECTS ON SOCIETY

ABSTRACT The last decade has seen an explosion in Foreign Direct Investment (FDI) especially in developing countries, where the returns on investment can be higher than in developed countries. Both developing and developed countries have liberalized their policies and introduced new policies to attract FDI inflows. This increase in FDI has had major effects on the social welfare of the citizens of developing host-countries. The purpose of this paper is to examine both the positive and negative effects of FDI inflows to developing countries in areas of politics, society, technology, finance, environment and culture, to determine whether or not FDI contributes to the well-being of society. This paper also provides an overview of the current trends in FDI flows and the relationship between FDI, multinational corporations, and society. INTRODUCTION Foreign Direct Investment (FDI) is the single most important instrument for the globalization of the international economy. Defined, FDI is the investment of real assets in a foreign country; it is acquiring assets such as land and equipment in another, host country, but operating the facility from the home country. FDI is viewed by many as necessary to stimulate the economies of both developed and underdeveloped countries. It has even been suggested that FDI will eventually replace official development assistance to underdeveloped countries. Between 1986 and 2000, the average annual growth rate of FDI was 25 percent. More recently after the September 11th terrorist attacks in the U.S., the global economy experienced a decrease in foreign investment flows. Developing countries have been hit the hardest by the decline in FDI as foreign investment is being redirected to more developed countries. In spite of the decline, it is expected that FDI will continue to be the most significant tool for globalization. It is widely accepted that FDI inflows provide economic benefits such as increased competition, technological spillovers and innovations, and increased employment. Yet the impact of foreign investment extends far beyond economic growth. At times FDI can be a catalyst for change to society as a whole, therefore one must think in terms of economic, political, social, technological, cultural, and environmental factors and examine all the effects of FDI in order to decipher the true long-term impact. As foreign investment and globalization continues to increase, developing countries desperately seeking to attract foreign investment can have undesirable outcomes. In this scenario FDI can have numerous negative effects, such as job loss, human rights abuses, political unrest, financial volatility, environmental degradation, and increased cultural tensions. The results of FDI on the global economy are complex and unpredictable; they can vary from country to country. This is due in part to the practices that are in place prior to receiving FDI inflows, such as deep-rooted social customs, political practices, laws and regulations. In more developed countries, such as Singapore, China and Ireland, the increase in foreign investment resulted in rapid economic growth and social development. Yet in unstable, underdeveloped countries, the results can be quite different. For the positive effects of FDI to be realized by undeveloped countries, major reforms in domestic policies must also take place. The purpose of this study is to examine the effects of FDI and to determine whether the benefits of FDI outweigh the costs. Arguments from both sides of the debate will be taken into account when assessing the true impact of FDI. LITERATURE REVIEW There is an abundance of literature regarding the impact of FDI on society. Most literature analyzes the relationships between FDI, multinational corporations, and governments. A majority of the literature analyzes one side or the other; however, in order to more accurately measure the situation, a more balanced assessment that examines both sides of the debate is necessary. …