The benefits of FDI on host economies and societies are widely known: Foreign Direct Investment is a vehicle for transferring technology, know-how, and management practices, via licensing agreements, imitation, and more advanced processes introduced by foreign firms, increasing efficiency and productivity. More so, FDI improves infrastructures and human capital by providing better training for local workers, and encourages new jobs' creation, leading to higher per capita incomes and household savings. Foreign Direct Investment also exerts a positive effect on domestic investment, supporting capital accumulation, providing funds, and contributing to overcome domestic saving gaps. Likewise, it increases the exporting capability in the host country and enhances competition in domestic markets, which leads to lower prices and higher real incomes for consumers.
Foreign Direct Investment inflows also have downsides, such as uneven distribution of FDI benefits in host countries, natural and human resources exploitation, and environmental degradation due to low ethical standards of big corporations. Despite this, empirical studies concluded that FDI contributes to income growth in host countries beyond what domestic investment would typically trigger.
FDI benefits do not accrue mechanically and evenly across countries. The magnitude of FDI’s effect on a country’s economic growth depends on several factors, which affect its absorptive capacity.