SOCIAL IMPACT OF DIRECT INVESTMENT
Direct investment is one of two large categories of foreign investment.
Direct investment refers to financial investments in a company in order to gain
control or ownership, while portfolio investment refers to financial investment for the
purpose of interest or dividends.
Foreign direct investment is defined as a company from one country making a
physical investment in another country. Foreign direct investment is a measure of foreign
ownership of productive assets. Growth in foreign investment can be used as one measure of
growing economic globalization.
The Social Impact of Foreign Investment - oecd.org
Multinational enterprises (MNEs) have become one of the key drivers of the world economy
and their importance continues to grow around the world. The increased influence of
OECD-based MNEs in developing countries is particularly striking. Today, developing
countries account for almost one-third of the global stock of inward foreign direct
The increased role of FDI in developing and emerging economies has raised expectations
about its potential contribution to their development. FDI can bring significant benefits
by creating high-quality jobs and introducing modern production and management practices.
However, the activities of multinational enterprises abroad have also aroused much
controversy and social concerns. For example, MNEs have been accused of practicing unfair
competition when taking advantage of low wages and labour standards abroad. In some cases,
MNEs have also been accused of violating human and labour rights in developing countries
where governments fail to enforce such rights effectively. In many OECD countries, civil
society has appealed to MNEs to ensure that internationally-recognised labour norms are
respected throughout their foreign operations.This Policy Brief presents the main insights
from OECD work on the social impact of inward FDI in host countries. It looks at how much
MNEs contribute to better working conditions in host countries and what governments can do
to promote good work practices by MNEs.
One way that FDI can be beneficial for host economies is by creating high-quality
jobs that are associated with higher pay and better working conditions. While there is no
reason, in general, to expect MNEs to offer better jobs than their local counterparts,
under certain circumstances, MNEs may find it in their interest to share their
productivity advantage with their employees. For example, MNEs may wish to rely more
heavily on pay incentives to ensure quality and productivity, given the higher cost of
monitoring production activities from abroad. MNEs may also offer above-market wages in an
effort to reduce worker turnover and minimise the risk of their productivity advantage
spilling over to competing firms.
FDI by OECD-based MNEs may also affect the quality of jobs available in domestic firms
when there are knowledge spillovers from foreign to domestic firms. For example, domestic
firms may learn from foreign firms by collaborating with them in the supply chain.
Knowledge transfers may also result from worker mobility, when domestic firms recruit
workers with experience in foreign firms. Finally, increased product-market competition as
a result of FDI may strengthen incentives among domestic firms to improve their
efficiency. However, FDI does not necessarily have positive effects on the performance of
local firms. Under certain circumstances, it may lead to the crowding out of local firms,
reducing their ability to operate at an economically efficient scale.