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Thus, according to the International Monetary Fund (IMF), foreign direct investment is defined as an incorporated or unincorporated enterprise in which a foreign investor owns 10 percent or more of the ordinary shares or voting power of an incorporated enterprise or the equivalent of an unincorporated enterprise (IMF – Definition of FDI terms).
Obviously, this ownership of 10 percent doesn’t give the investor the possibility to have control over a firm. However, it is a decent and by no means negligible percentage, which provides the investor with the adequate influence in the operation and management of the enterprise. This is the main reason why governments try to maintain a control and keep an eye on who is investing in the internal market of their country (Definition of Foreign Direct Investment, A methodological Note – Banco de Espana).
This last point becomes more important when it is amplified that FDI describes a long term and stable relationship between the foreign investor and the domestic business.
By extension, the aforementioned, becomes the first and most important benefit that foreign direct investment brings to the economy of a country; a more permanent and visible footprint and the economic stability as well as security of the investments.
On the contrary with the so called “hot money”, the permanent investment of FDI is also more resilient during financial crisis. For example, the resilience of FDI during financial crises was evident during the Mexican crisis of 1994-95 and the Latin American debt crisis of the 1980s. What is more, such investments were remarkably stable during the global financial crises of 1997-98 while this was not the case with the short term investments that were subject to large reversals during the same period (Finance and development magazine, volume 38, number 2 - Prakash Lungani - Assaf Razin). Such short term investments can create an asset bubble in a country, by investing lots of money in a short period of time, yet selling their investments just as quickly later on (About.com – US Economy, Foreign Direct Investment). This flow rush and the voracious money circulation can wreak economies and regimes over a night.
On the other side of this coin there is the FDI, which dissuades all the aforementioned by engaging investors with the businesses and the local economies where they put their money into.
A second advantage of the Foreign Direct Investment is the added value that the very definition of FDI grants to the money invested. With FDI, any investor from everywhere in the world can see its money growing by investing in the most promising businesses and the most promising economies. Even from the social point of view, FDI disregards ethnicities, hatreds or other social norms. It implements globalization to its core and knows no borders and no obstacles. Thereby, investors are completely free, the competition grows bigger and even monopolies are destabilized due to global invigorated competition; in other words FDI becomes an incentive for firms everywhere in the globe to improve their services and products and in this pace to meliorate social welfare towards the local citizens. There is a critique though, upholding the view that the entrance of multinational companies in other countries might hurt the local economy and create for the domestic firms barriers to entry; the statistics however doesn't show such a negative correlation and in many cases this indicates even positive results (especially in the developed countries that acquire really concrete and stable economic institutions) (D. Kirkilis, Foreign Direct Investment, pp 206, 2010)
A third advantage the FDI provides is the spillover effect in terms of technology and innovation. It is common sense that not all the countries around the world share the same access to technology or even are able to have access to facilities and premises in order to use technology towards innovation or towards Research and Development (R&D). With FDI yet another barrier is abolished. Economies and societies don’t need to depend entirely in their own research results or their own resources. They can scale up the economy by the transfer of technology and innovative tools; plus due to their relying on the norms of multinational companies, they can become a tool for political pressure to their local government by preventing poor economical politics and bad decisions.
The fourth advantage of FDI targets the human capital factor. Local companies can get best practices and use them among their employees. They can receive and implement the needed know how on training them, advancing their possibilities and increasing their effectiveness by improving their working and life style. Of course, this advantage has its own spillover effect directly to the local society, since the behavioral change and attitude of the people, their advancement and an increased self esteem (due to higher efficiency in the workplace) are along with working ability and economic affluence the highest stabilization factors a society can achieve. So, trained and satisfied workforce (due to FDI) can lead to stability and flourishing or a welfare state. Regarding the Serbian case, in order to reach a concrete conclusion we need a thorough and deep analysis of the economic environment of the country and the trends of the last 20 years (as we need to keep in mind that the transition from a centrally planned to a market economy happened not that long ago). But from what one can see, the advantages of FDI can overcome any disadvantages and convince even the more skeptical.