Foreign direct investment is an investment done in another organization business located in another country by an international firm or individual. The resilience of foreign direct investment during financial crises in developing countries has proved to have momentous advantages over equity and debt capital flows. For instance, financial crises that occurred between 1997 and 1998 in East Asian countries, foreign direct investment was remarkably considered compared to other forms of private capital flows. Therefore, considering the significant reversals caused by other forms of capital flow, foreign direct investment has various momentous advantages over debt capital flows and equity.
Capital Flows
The free flow of capital enhances the highest rate of return of capital across national borders. However, as designated by Feldstein, the unrestricted capital flow may also accrue some advantages. International capital flow helps in diversification of investments and reducing risks. It also accounts for corporate governance, best practices of legal traditions, and accounting rules. Besides, the mobility of capital ensures proper governance policies. Regarding the prior benefits of the flow of capital, FDI tags along with some advantages too. Foreign direct investment fosters the economy of a host country in three ways: technological advancements, revenue collection effect, and enhancement of competition among the existing firms. FDI facilitates the transfer of advanced technology among countries, hence, promoting competition in the domestic input market. The host country receiving FDI services benefit too from the personnel training carried out in the course of operating new businesses. FDI also contributes to an increase in revenue streams of the host country in the form of corporate tax revenues.
In summary, foreign direct investment has significant advantages in growing economies over debt capital flows and equity. FDI allows for higher rates of return of capital across national borders. It also facilitates proper governance policies of a host country, among others. Therefore, governments across national borders need to take heed of FDI in their respective countries for appropriate advancements of technological factors, linkage effects, and enhancement of competition.