Fdi Economic Growth

Answer:

Foreign direct investment may threaten local industries:

As foreign companies put money into a nation and buy its companies and even bring in some of their own offices, local governments may feel a loss of economic power as all of it will be consolidated in the hands of foreign companies. Foreign companies may also drive less profitable local companies out of businesses and hurt national (not foreign) industry. As a result, many developing nations put strict limitations on the amounts of foreign direct investment in their nations.

Supplementary Answer

The above answer is correct - this supplemental answer expands on this principle.

Foreign national companies are foreign owned. While that sounds obvious, it has subtle but important implications on the governance and operation of the company.

1. Profit

In the free economy, companies exist to make profit. A wholly owned subsidiary of another company has a business obligation to generate profit for its parent company. Profit is transferred from the subsidiary company to the parent company through earnings and dividends. Locally owned companies keep their profit in the local economy - that means that the profit stays in the country, and thereby creates wealth within the local economy.

A subsidiary of a foreign national company returns some of its profit to its foreign-owned parent company. This profit leaves the country, and therefore less wealth accumulates in the local economy. To use a crude analogy, it is akin to owning a house, where you accumulate wealth through the equity you accrue, compared to renting a house, where all your payments go to someone else. The house accumulates wealth whether you own or rent it, but if you rent the house, it is not your wealth - someone else is accumulating that wealth. Similarly, when a foreign national owns a local company, that foreign parent company accumulates the wealth generated from the profits of the local company, and that wealth is not...