Cost, Benefits and Effects of Inward Direct Investment Literature review

Cost, Benefits and Effects of Inward Direct Investment - Literature review Example According to Mondy (2013) Inward foreign direct investment is seen as a spillover superior technology hence extending to domestically owned firms. Foreign-owned firms are seen as the main cause for increasing wage levels in a host’s countries and also lead to higher productivity compared to local firms. Also, the impact of inward foreign direct investment is witnessed in promoting exports of host countries. There is a spillover of production skills which have transformed the economies of host countries (Mondy, 2013). Much of the impact is seen when knowledge of the world market is transferred from foreign-owned firms to domestically owned firms. Introduction FDI refers to Foreign Direct Investment; the investment can be into a business or production of the country by another country or an individual of another country. This investment can either be by expanding production of existing firms in the target country or by coming up with a new business in the target country.  In d eveloping countries, FDI and exports are the key elements that lead to the growth of this country’s economy. Countries which dominate the largest part of the world’s economy, for instance, United State of America are mainly foreign direct investors. Impacts of inward direct investment can either be long term or short term (Cainelli et al., 2004). Short term effects include an increase in the production of existing companies. On the other hand, long term effects include impairing local innovations as foreign investors tend to control the economy in the long run. Inward foreign direct investment It has been suggested Cainelli et al., (2004) inward foreign direct investment (IFDI) is said to encourage innovativeness on local firms, through investing in the existing local business. This will encourage the use of modern technology in productivity, leading to an increase in production by local firms. Cash flow in local firms will increase due to modern advanced technology. I ncrease in innovation levels by local firms is due to knowledge brought in by foreign investors to domestic investors. Creation of job opportunities is witnessed in local firms since there is an increase in the wage rate which makes domestic workers remain in a local firm. Outputs in local firms relatively increase due to the advancement in technical supply requirement leading to economic growth in target countries. It is also believed that investing in foreign companies and individual posses’ technological superiority comparative to those of host countries.