Disadvantages of Foreign Direct Investment

Foreign direct investment has been criticised for the following reasons :

• FDI tends to flow in the areas of high profits rather than in the priority sectors of the host country.
• Considerable funds are repatriated from the host country in the form of royalty, fees, dividend, interest, etc. on FDI. Such outflows put pressure on the host country’s balance of payments. The cost of FDI is high.
• FDI takes place4 mainly through multinational corporations. These corporations are large in size and have a wide resource base. They pose a threat to the domestic firms in the host country.
• The technology brought in by the foreign investors may not be appropriate to the market size, resource base, stage of economic development and consumption needs of the host country. Excessive reliance on foreign technology may have an adverse effect on local initiative.
• FDI poses a threat to the economic autonomy and political sovereignty of the host country. Some of the multinational corporations have destabilized governments in African countries. Excessive reliance on foreign technology may have an adverse effect on local initiative.
• FDI can lead to adverse effects on domestic savings, and adverse terms of trade for the host country which offers special concessions to attract FDI. Some foreign investors pre-empt investment plans of domestic companies. They engage in unfair and unethical trade practices.
• FDI may involve costs and risks for the home country. Employment opportunities may shrink and balance of payment position may suffer due to FDI.