The stability and growth of an economy requires more than just good policies to be implemented since a big factor that drives an economy forward is capital. Amid numerous capital inflow options in a country like loans and personal investment portfolios, the most resilient one, even during a financial crisis, is foreign direct investment (FDI).
An FDI occurs when an individual or company invests in a business in another country, designed to establish a lasting interest over it. In short, if they have a voting power of at least 10% in that company, it’s classified as an FDI and the beneficiary of the investment can take advantage of the benefits of the additional profit.
Generally, there are more FDIs in a country when investors see that the economy is stable. For example, once Cambodia restructured to become a free-market economy in recent years, foreign investors increased where in 2021 alone, there was $4.35 billion FDIs reported by the Council for the Development of Cambodia (CDC).
However, how exactly do FDIs help developing countries like Cambodia? We’ve curated its benefits, so check it out below.
1. Stimulates the economy
Foreign direct investments help boost an economy forward, especially since it’s a free-flow capital that can net higher profit returns, both for investors and the country alike. For example, the FDIs in Cambodia were divided mostly into the following sectors: agriculture, infrastructure, tourism, and industries.
In infrastructure alone, the country has seen numerous high-quality commercial and residential spaces built, thereby increasing the living spaces for residents as well as driving businesses forward. In short, not only does FDI help improve the economy but it stabilizes it and ensures a higher-quality of living for everyone.
2. Drives local competition
When a foreign company makes an investment into a company in a developing country, it forces the other businesses in the same industry to improve. Not only does productivity improve in these local companies, but so do their results, efficiency in allocating resources as well as in completing their company goals, and even lower prices for some products.
While the degree of competitiveness spurred on by foreign investors depends on the country as well as industry, suffice it to say, FDIs help improve domestic companies’ performance, services, and products.
3. Increases employment and creates higher income jobs
More FDIs mean that there are more employment opportunities for residents of that country. It’s possible since the FDIs often take advantage of expanding the business they invested in, bringing people with higher skills, and more. This means that FDIs also help in increasing the salary range available in the developing country where the investment was made.
4. Accessibility of skills, technology, and expertise
When there’s an FDI, not only does it mean more capital for a company but also direct access to foreign countries’ skills, technology, and expertise. Generally, these foreign multinational enterprises (MNEs) have a more advanced research and development in terms of improving efficiency, getting results, and dominating the market. With a shared connection due to the investment, local companies can step up and improve their skills, technology used in their industries, as well as become more of an expert in their fields.