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
Multinational Enterprises (MNEs) or Multinational Corporations (MNCs) have become one of the key drivers of the world economy and their importance continues to grow around the world. Today, developing countries account for almost one-third of the global stock of inward foreign direct investment. The increased role of foreign direct investment in developing and emerging economies has raised expectations about its potential contribution to their development. Foreign direct investment 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, multinational enterprises have been accused of practicing unfair competition when taking advantage of low wages and labour standards abroad. In some cases, multinational enterprises have also been accused of violating human and labour rights in developing countries where governments fail to enforce such rights effectively. In many Organisation for Economic Co-operation and Development countries, civil society has appealed to multinational enterprises to ensure that internationally-recognised labour norms are respected throughout their foreign operations.This Policy Brief presents the main insights from Organisation for Economic Co-operation and Development work on the social impact of inward foreign direct investment in host countries. It looks at how much multinational enterprises contribute to better working conditions in host countries and what governments can do to promote good work practices by multinational enterprises.
One way that foreign direct investment 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 multinational enterprises to offer better jobs than their local counterparts, under certain circumstances, multinational enterprises may find it in their interest to share their productivity advantage with their employees. For example, multinational enterprises may wish to rely more heavily on pay incentives to ensure quality and productivity, given the higher cost of monitoring production activities from abroad. multinational enterprises 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
Foreign direct investment by Organisation for Economic Co-operation and Development-based multinational enterprises 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 foreign direct investment may strengthen incentives among domestic firms to improve their efficiency. However, foreign direct investment 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.