Several studies have certified that there is a direct relationship between economic growth and foreign direct investment (FDI); hence the importance of foreign capital inflows on the economic progress of nations. FDI is the participation of foreign investors in any proportion of the share capital of companies in the recipient countries.
The settling of foreign companies in the recipient countries will result in the creation of strong incentives for local companies to optimize their productive processes, increasing their operative efficiency.
FDI attraction policies are associated with macroeconomic, political and social stability, reduced country risk and investment on productive infrastructure.
There are many positive effects of FDI on national economies. Capital formation, creation of jobs, company competitiveness, technical qualification and transfer of technology, among many others.
In order to maximize direct benefits for the recipient countries, it is important for there to be internal policies aimed at attracting investments, as well as regulations allowing for the creation of conditions that make the country attractive for investors. Recipient countries must establish transparent policies to promote investments, while creating or strengthening any institutions related to this matter. Investment Promotion Agencies play a key role as channels to favor the reception of foreign capitals within each of the different economic sectors that make up the country’s economy.
Factors required to attract FDI to a particular country are closely linked to the competitive advantages of production processes in each country. Those countries which have a greater competitive advantage because they have larger reservoirs of natural resources or raw materials will attract more foreign capital inflows. Likewise, those countries with qualified human capital, and whose internal economies are somehow already connected with other developed markets, will be better positioned to receive foreign capital inflows.
It must be noted that FDI should permeate into all production levels of recipient countries, in order to offer greater financial stability, promote economic development and enhance the wellbeing of societies.
This phenomenon concerning the evolution of international economic integration is not exclusive for large transnational corporations, and countries should seek direct and stable links to improve the competitiveness of local companies, in such a way that small and medium-sized companies increase their participation in the FDI to export their products through a network of related companies, creating an improved production chain.