Abstract

There is considerable controversy about the relative costs and benefits of foreign direct investment to developing countries. The principal argument in its favor is that the package of capital and technological and managerial resources generally increases the real domestic income of the host country by more than the profits returned to the investor. This increase is manifested in higher tax revenues, higher labor incomes, or lower prices. Moreover, since profits are earned only when the investment earns a positive return, part of the risk is borne by the foreign investor. Nevertheless, the association of direct investment with some degree of overseas managerial control, and generally with large transnational companies, can have wide-ranging effects on the economy of the host developing country. Concern that some of the activities of the enterprise might have adverse consequences for a country’s development prospects may lead to the adoption of restrictive policies toward foreign direct investment. This concern has been reinforced by dissatisfaction with some of the results of earlier investments.