The following points highlight the top three benefits of foreign investment. The benefits are: 1. New Jobs 2. New Technology 3. Foreign Exchange Earnings.
Benefit # 1. New Jobs:
Firstly, foreign investment is likely accelerate the rate of growth of developing countries and create more jobs and incomes in the process. However, there is a limit to the number of jobs created directly by foreign investment due to the fact that host countries often impose restrictions on the entry of foreign capital in certain industries. Since foreign capital is not allowed in a number of industries, the employment potential of such investment is often limited.
Usually, LDCs invite foreign investment in highly capital-intensive industries such as iron and steel, petrochemicals, oil drilling or mineral extraction. Since capital goods are expensive and often require modern (sophisticated) technology to operate, foreign firms can build up a capital- intensive industry much faster than the developing country.
In fact, multinational corporations not only import capital but also act vehicles for the transfer of advanced technology to developing countries. However, most industries set up with foreign capital, may provide direct employment to just 300-400 workers.
But, it may have secondary effects. The creation of these few hundred jobs, along with other expenditures by the refinery or mill, will stimulate the economy by raising incomes across the economy, through the multiplier effect.
Benefit # 2. New Technology:
Economic growth depends not only on the growth of resources (such as growth of the labour force, bringing new land under cultivation and capital formation such as setting up of new factories or power plants, or constructing new roads and highways) but on technological progress as well.
Technological progress has the effect of raising the productivity of existing resources. But, technological progress depends on investment in scientific research. This is a costly affair. Most LDCs do not have sufficient resources to finance such research programmes.
This is why most expenditures on research and development are made in the major industrial countries like Japan, the USA, Canada, France, Germany, etc. These are the countries which develop most of the new processes that make production more efficient. For the LDCs, with limited scientific resources, industrial nations are a very important source of information, technology and expertise.
The ability of foreign firms to utilise modern sophisticated technology in a developing country depends to some extent on having an abundant supply of engineers and technical personnel in the host (capital-importing) country.
India and Mexico have a fairly number of technically qualified personnel in the persons. This means that new technology can be adopted relatively easily and quickly. Other countries where there is a dearth of such personnel must train workers and then pay them handsome compensation to keep from migrating to industrial countries.
Benefit # 3. Foreign Exchange Earnings:
LDCs also expect that foreign investment will improve their balance of payments. This expectation is based on a very simple assumption: the multinational firms located in LDCs increase exports and generate greater foreign exchange earnings that can be used for importing capital goods (required for producing export items) or for repaying foreign debt.
If foreign firms produce import-substitute items — both capital goods and consumption goods — which were previously imported, the balance of payments position is likely to improve. However, this is not the whole truth.
In fact, foreign firms may cause balance of payments problem of a serious nature by sending back a major portion of their earnings every year to the home (capital-exporting) country. Such a problem may arise if the value of profits repatriated by foreign firms exceeds the value of foreign exchange earned by exports.