DISADVANTAGES OF FOREIGN DIRECT INVESTMENT

1. It stops domestic investments from happening.

A 10% minimum investment into a foreign company is money that isn’t going into domestic companies. Although money comes back into local communities with FDI, a local investment’s value is almost another $1 for every dollar spent. That means a $10,000 domestic investment could be worth $20,000 or more in the future.

2. It isn’t without risk.

Political instability around the world means that the business environment can change at a moment’s notice. Although companies and individuals choose foreign organizations that have little risk, there can never be a complete elimination of risk from the transaction. In some countries, the political risk factors could be so high that a foreign direct investment doesn’t make sense.

3. It can be more expensive.

In the United States, the dollar is one of the strongest currencies in the world. For an investment into the developing world, the value of the currency can be stretched further than it would be domestically. That isn’t always the case, however, because the euro and the pound trade higher than the dollar. Investing into one of those markets through FDI would actually have higher costs for the individual or business compared to a domestic investment.

4. It can affect currency exchange rates.

A developing country with a struggling currency may see a surge of popularity after a foreign direct investment. People and companies see an investment as a sign of stability, creating additional interest in the market being examined. That higher level of interest can lead to a better monetary value for the foreign nation, which may destabilize exchange rates.

5. It can lead to exploitation.

Exploitation of FDI can happen on a number of levels. A foreign government might choose to seize the investment. Assets or proprietary information might be seized for political purposes. The foreign company might take the investment and squander it. Even if there is a well-constructed contract governing the terms and conditions of the investment, some foreign companies may decide to take the money and run. That can leave an investor with few, if any, options to recover their funds.

These foreign direct investment advantages and disadvantages provide a foundation for the decision-making process. Every key point must be carefully considered before completing a transaction. That way, the best possible outcome can be achieved for everyone involved in the investment.

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