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Posted on March 24th, 2013, by

Observing this theme, let us focus our attention on specific sectors of the Russian economy that are more attractive to foreign investors and have good export potentials (food industry, ferrous metallurgy, machine building and metal and oil industry).

Like any other complex economic phenomenon, foreign direct investment can have both positive and negative impacts on the host economies.
As an international practice shows, the positive effects of foreign capital may include:
Ӣ Increasing volumes of real investment and accelerating economic development;
Ӣ Improving a balance of payments;
Ӣ Using local savings for the realization of profitable projects;
Ӣ Involving local capitals and strengthening the local financial market through the use of its resources for productive purposes;
Ӣ Better use of local natural resources;
Ӣ Increasing employment, skills, productivity of local labor force;
Ӣ Broadening the range of products;
Ӣ Expanding exports and foreign exchange earnings;
Ӣ Increasing tax revenues, allowing the state to expand funding for social and other programs;
Ӣ Improving living standards;
Ӣ Using higher environmental quality standards, expanding access to cleaner technology, reducing an overall level of environmental pollution;
Ӣ Developing infrastructure and services;
”¢ Increasing the country’s confidence, which will attract new foreign investors;
Ӣ Increasing the competition in the domestic economy and reducing its level of monopolization;

Ӣ Improving the socio-cultural situation in the country, the proliferation of international standards not only in production, but also in consumption.
In addition, foreign direct investment is a stable source of funding. The constant flow of foreign investment provides a continuous supply of capital in a host economy, which increases its production capacity, but also affects its capital accumulation. Foreign direct investment also increases a host country’s competitiveness. The constant flow of investment increases its productivity. Investments also increase product quality, and this fact affects the competitiveness of products and expands ties with the foreign markets.

The negative effects of foreign investment include the following:
 Repatriating capital and profit remittances in the various forms (dividends, percent, royalties, etc.), which worsens the host country’s balance of payments;
 Increasing imports of equipment, materials and components that require additional foreign exchange costs;
 Suppressing local producers and restricting a competition;
 Increasing the dependence of the national economy and threatening its economic and political security;
 Declining the traditional industries of the national economy;
 Increasing a social tension and differentiation (in particular, due to higher wages at the foreign enterprises);
 Weakening the incentives for the national researches and development, due to the foreign technologies, which ultimately could lead to the dependence on technology;
 A negative impact on the socio-cultural conditions associated with the neglect of national traditions and characteristics, etc.
Moreover, the negative impacts of foreign investment on a host economy are the effects of ousting domestic investment by foreign investments, that is, local businesses do not have the capacity to develop, grow, and flourish at the world market. Furthermore, it should be mentioned that due to the invasion of foreign capital, export and import of the host country’s products can be significantly reduced since the products of foreign companies are more acceptable to the foreign markets.

It is also important to note that the absence of a clear program and a prudent policy of cooperation with the global companies engaged in financial inflows into the country, inflows of foreign investments may negatively affect both the international competitiveness of the country and the prospects for its further growth.

The migration of foreign direct investment between the countries has a great impact on the labor market in both countries – importing counties and exporting ones. The impact of foreign capital on the labor relations may be direct or indirect, and covers the following main areas of impact: quantitative and qualitative characteristics of the labor market and its regional aspects.
Thus, a direct positive impact of foreign investment on the labor market in the host country is manifested in the creation of new jobs, higher wages for increased productivity, and offers a more skilled labor in areas with high unemployment.

The negative impacts of FDI on the labor market are the following: a decrease in the number of jobs in connection with the expulsion of domestic companies from the market, a negative pressure on the labor market of large cities and increasing disparities in the levels of employment and wages between the different regions of the country.
Examining the impacts on the country’s capital market and trade balance, it is possible to emphasize that a capital transfer abroad adversely affects a balance of payments, and a capital outflow negatively affects the level of employment in the exporting country. The fall in prices has a direct effect on a trade balance.

To sum up the above-stated information, it is possible to conclude that foreign direct investment plays a crucial role in creating an integrated international production system that is the world economy’s industrial core. Thus, inflows of foreign direct investment have both positive and negative consequences. That is why the host countries and their economic operators, who intend to develop joint ventures with foreign partners, should carefully evaluate the pros and cons of such projects and pursue adequate policies regulating foreign investments, which will allow a host country to use their positive effects and eliminate or minimize the negative ones.



Works sited
Chen, Tain-Jy, Homin Chen, and Ying-Hua Ku. “Foreign Direct Investment and Local Linkages.” Journal of International Business Studies 35.4 (2004): 320-333.
Doukas, John A., and L. H. P. Lang. “Foreign Direct Investment, Diversification and Firm Performance.” Journal of International Business Studies 34.2 (2003): 153-172.
Killingsworth, Mark. Labour Supply (Cambridge Surveys of Economic Literature). Cambridge: Cambridge University Press, 1983.
Sethi, Deepak, et al. “Trends in Foreign Direct Investment Flows: A Theoretical and Empirical Analysis.” Journal of International Business Studies 34.4 (2003): 315-326.
Sullivan, Arthur, and Steven M. Sheffrin. Economics: Principles in action. New Jersey: Pearson Prentice Hall, 2003.

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