Negative impacts or disadvantages of FDI
Negative Impact of Foreign Direct Investment (FDI) In most countries, public opinion towards foreign enterprises is not very favourable and FDI is feared due to its impact on domestic firms, the economy, and culture.
The major concerns about the negative aspects of FDI are as follows
(1) Market monopoly: Multinational enterprises (MNES) are far more advanced than domestic companies, owing to their large size and financial power. In some sectors, this is leading to MNE monopolies, thus impeding the entry of domestic enterprises and harming consumers. MNES’ ability to operate at a large scale and invest heavily in marketing. and advertising and R & D activities differentiate their products and makes entry of new firms far more difficult as they are unable to make similar investments in R & D and marketing strategies.
(ii) Crowding-out and unemployment effects: FDI tends to discourage entry and stimulates exit of domestic entrepreneurs, often termed as the crowding-out effect. As FDI enterprises are often less labour intensive, their entry results in higher unemployment and increased social instability,
(iii) Technology dependence: MNEs often function in a way that doesn’t result in technology- sharing or technology-transfer, thereby making local firms technologically dependent or technologically less self-reliant.
(iv) Profit outflow: Foreign investors import their inputs and use the host country as a processing base, with little value-added earnings in the host country. A large proportion of their profits may be repatriated.
(1) Corruption : Large foreign investors often bribe government officials and distort market forces.
(vi) National security: With MNEs holding a dominant position in sensitive industries, such as telecommunications, and the supply of core equipment and software for the information technology (IT) industry, there Na danger that the strategic interests of the host country may be compromised.
