Foreign Direct Investment: Benefits and Costs

Foreign direct investment (FDI) is investment that gives a foreign company lasting control or significant influence over a business, usually defined as owning at least 10 percent. It can be 'greenfield', building new factories, or take the form of mergers and acquisitions of existing firms. Host countries often compete to attract FDI with tax breaks and special zones, hoping for jobs, exports, tax revenue and 'spillovers' as local firms learn technology and management practices.

Ireland drew major technology and pharmaceutical firms, and Intel's 1996 decision to build a chip plant in Costa Rica helped diversify that economy. Yet spillovers are not automatic; foreign firms may import most inputs, repatriate profits and compete with local businesses. Investment treaties protecting foreign investors, including investor-state dispute settlement, are controversial because firms can sue governments over regulations. Policymakers therefore weigh FDI's benefits against the costs of incentives and limits on policy freedom.