05 Jun 4 ways that Foreign Direct Investment can help to reduce poverty
Foreign direct investment has become a thing among corporates who wished to grow their wealth, anyone who has money is able to invest, perhaps it is the most legalized form of gambling. Companies or firms likes to invest mostly to a foreign companies abroad, this is what we call Foreign Direct Investment or FDI for short.
1. What is Foreign Direct Investment?
Foreign direct investment is when a company or firms took their investment beyond the borders of their origin country. It was done by establishing a foreign business operations between the investor and the recipient, or can also be done when the investor obtain foreign business assets from a foreign company. For example, Royal Dutch Shell, a British-Dutch multinational oil and gas company has been investing to Indonesian state-owned oil and natural gas corporation called Pertamina in 2019 (until now)
Foreign direct investment has different types too, there are horizontal, vertical and conglomerate.
Horizontal means that investors establish the same type of business in a foreign country as they did in their home country, like Taco Bell that just open their first branch in Indonesia in December 2020. Vertical means that investors establish a different kind of business in a foreign company, but still related to the main business as it helps the business running, like a manufacturing company that invest to a foreign company that supplies raw materials so the inventors company can keep producing. Conglomerate is the complete opposite of horizontal, the type of business established from the foreign country and the home country is completely different, wasn’t so hard to understand is it not.
So far, known examples of Foreign direct investment are mergers, acquisitions, retail, services, logistics, and manufacturing. Foreign direct investments and the laws governing them can be crucial for company’s growth, and if it’s successful enough, it would help to reduce poverty rate of a state.
2. How Foreign Direct Investment Helps Poverty Reduction
Foreign direct investment is an important clue to unlock successful economic growth in developing countries, it is said that economic practices across borders is the very essence of economic development. Foreign direct investment can increase the economic growth, it is one of the tools of poverty reduction
Foreign direct investment accelerate economic growth, thus become a great ingredient for poverty reduction. Because economic growth tends to lift the incomes of the poor along with the overall growth. This approach might not go smoothly in all part of the world, it is quite ambiguous to translate Foreign direct investment into economic growth.
In that case they can use different approach. Instead of just to generate growth, FDI can also help developing countries to:
– Stabilize the out-of-control capital flows and income
– Improve social and environmental standards
– Establish social safety net and improve basic services for the poor
Protecting the Poor from Financial Volatility
Foreign direct investment helps stabilize the flow of country’s finance, preventing it from going out of control. Given that the poor have suffered disproportionately during currency and financial crises in the past, reliance on FDI helps protect the poor from the impact of volatility in international financial markets, acting as a safety net. Won’t stop from there, foreign investors might contribute by paying taxes that is allocated to help the poor.
Going back to the first chapter, foreign direct investment has different types. Horizontal FDI has the highest chance to grew out new employment opportunities as it established a new business institutions in the host country, thus creating new job vacancies for the citizens. Of course since the vacancies were brought in by a foreign firms or companies, new recruits better had the sufficient amount of requirement for the job, it’s all depends on the people again.
Improved Wages of Local Employees
With a great amount of Foreign direct investment, one of the effects are often to raise wages of relatively well skilled workers in developing countries. This will result in inequality, yes, but over time as productivity improves, it’ll benefit the people and incomes become again more equal than before. FDI thus helps improve income growth in the low wage countries. To this extent FDI actually helps equalize the global distribution of incomes.Foreign direct