Foreign direct investment (FDI) has become one of the contributing factors to growth in world’s economy. FDI has been increasing constantly over the years with foreign identifying a market and production niche in other countries for prospective investments. Most developing nations are structuring policies which attract and retain multinational firms in order to develop their economies. These countries have designed policies which enable them to tap utmost benefit from foreign investors operating in the country. Research indicates that the main reason which countries especially those in economic transition stage seek to promote FDI is to alleviate poverty and boost economic performance (Rolfe et al, 1993). This paper seeks to address the cost and benefits of multinational investments to host financial system.
Benefits of FDI to Home Economies
The benefits of FDI to parent economies may be explained through the inward theory of FDI. The theory suggests that host countries can only benefit from FDI through the presence of specific factors of macroeconomics in the country. Such include the level of savings of the host country, the balance of investments as well as the degree to which the country has integrated its local financial systems with international standards. The theory argues that host countries with equitable amount of savings and adequate balance of investments are able to create conducive business environment for foreign investors. The inward FDI theory tries to establish the benefits of multinational ventures in respect to performance of the macroeconomic factors that may influence growth in economy of host nations. The theory suggests that FDI enables accumulation of investment resources in host economies, it also ensure that the country has access to…”