Limitations of Foreign Direct Investment (FDI)

Besides, these favorable impacts of FDI, there are some limitations which have been discussed as follows. 

Foreign Enterprises Depend on Domestic Capital: Very often foreign enterprise brings very limited capital. It takes recourse to borrowing from domestic capital markets and banks. It has been the experience of a number of developing countries where foreign enterprises have depended to a large extent on domestic capital markets and have heavily borrowed from the national financial institutions. Thus, they compete effectively with the national firms for scarce capital available domestically. Very often they deprive national firms of the needed capital. Thus, the argument that they bring sufficient capital is spurious. 

Ned not Necessarily Remove Balance of Payments Constraint in the Long Run: While FDI may remove balance of payments constraint in the initial stages, the outflows generated in the form of dividend, royalty and technical management fees may be far in excess of equity inflows in the early stages. Further, many foreign enterprises take recourse to loan finance rather than equity finance. This obviously is a fixed liability on the enterprise as well as fixed commitment for the balance of payments.

Over and above this, when enterprises want to move their capital out of the country, the repatriation may create balance of payments crisis. 

Does Not Transfer Technology Effectively: Foreign enterprise very often keeps control of technology. Therefore, effective transfer of technology and management skill does not take place. What it does is to transfer technology relating to adaptation to local conditions otherwise one has to deal with trouble shooting technologies. Fundamental aspects of technology are strictly kept with the parent company. Thus the host economy, specially the developing countries, may not have effective transfer of technology arising out of FDI. 

FDI is not a Provider of Additional Employment: It is argued that this will arise when FDI does not substitute national investment. When FDI Substitutes national investment, what exactly happens is that it replaces employment opportunities that could have been created by the national enterprise. Thus the net employment opportunities generated will be insignificant. Further, there are no effective backward linkages for the Transnational Corporations. The operations of TNCs would depend on imports for getting their supplies rather than depending on domestic sources of supply of host countries. 

Does Not Create Higher Wages: Most often FDI indulge in exploiting the wages in host, developing countries. Hence the argument that they generate higher wages is not correct. Further, the employment of local personnel in high paid jobs is less for it is very often taken by foreign nationals.

Does Not Create Additional Exports: Most often FDI comes to exploit the domestic market. Barring a few export processing zones, the foreign enterprises most often exploit the domestic market. 

Does Not Create Competitive Environment: The TNCs through their market power always create oligopolistic or monopolistic market conditions. Three or four TNCs control the market. 

The present consensus has been that despite this debate, the FDI has a net positive impact on the development of developing countries. It may, however, be noted here that for growth and development of an economy it is not necessary for the economy to depend an FDI flows There are a number of cases of countries which have developed without large inflows of FDI. Notable examples are Japan and South Korea.