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Foreign direct investment benefits host countries through infrastructure development, technology transfer, and human capital influx. This link is more evident in less developed countries, where investments can lead to the construction of sophisticated refineries and the introduction of advanced technology. Companies also acquire excellent human capital to help set up subsidiaries, which benefits the host country’s workforce.
The connection between foreign direct investment and economic growth is based on the benefits accruing in a host country as a result of investment by foreign companies. An analysis of the link between foreign direct investment and economic growth can be addressed by the physical or infrastructural benefits as a result of the relationship. It can also be studied from the point of view of the inflow of technology and the inflow of human capital in relation to the benefit to the economy.
A direct link between foreign direct investment and economic growth is the contribution of those investments to the infrastructural development of the host or local country. This type of economic advantage is more evident in less developed countries than in more industrialized nations. An example of this link between foreign direct investment and economic growth can be seen in an oil company from an industrialized nation investing directly in a less developed country with an abundance of crude oil. The investment could be the construction of sophisticated refineries that the host country probably would not have managed on its own. When the refineries are fully functional, they will serve as a means of extracting and packaging crude oil for sale on the international market, as well as a source of income for the host country.
Another link between foreign direct investment and economic growth comes from the benefit the host country derives from incoming technology. When companies invest in a local economy, they can introduce more advanced technology than they get in the host country. Such superior technology can actually be part of the corporate strategy of investors who can choose a country with a shortage of the technology they have as part of minimizing competition. In that case, the host country can use the technology to its economic advantage.
One aspect of foreign investment is the human capital that comes with that investment. When a company researches international markets to invest in, part of the business strategy is to acquire excellent human capital to help set up the subsidiary. For example, if a company decides to open a branch in another country, they will look for some of their best employees with proven track records to manage the place. It will also employ the most competent employees with the best human capital to work in the new branch. Such an influx of human capital is also economically beneficial to the host country as local personnel can improve their human capital, which will continue to serve as a benefit to the country even if the company ceases operations in the local country.
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