One of the requirements for economic development in a low-income economy is an increase in the nation's stock of capital. A developing nation may increase the amount of capital in the domestic economy by encouraging foreign direct investment. Foreign direct investment occurs when foreign firms either locate production plants in the domestic economy or acquire a substantial ownership position in a domestic firm. This topic will be discussed further in Chapter 9.
Many developing economies have attempted to restrict foreign direct investment because of nationalist sentiment and concerns about foreign economic and political influence. One reason for this sentiment is that many developing nations have operated as colonies of more developed economies. This colonial experience has often resulted in a legacy of concern that foreign direct investment may serve as a modern form of economic colonialism and that foreign companies might exploit the resources of the host nation. In recent years, restrictions on foreign direct investment in many developing economies have been substantially reduced as a result of international treaties, external pressure from the International Monetary Fund (IMF) or World Bank, or unilateral actions by governments that have come to believe that foreign direct investment will encourage economic growth in the host nation. This has resulted in a rather dramatic expansion in the level of foreign direct investment in some developing economies. Foreign direct investment may encourage economic growth in the short run by increasing aggregate demand in the host economy. In the long run, the increase in the stock of capital raises the productivity of labor, leads to higher incomes, and further increases aggregate demand. However, another long-run impact comes through the transfer of technological knowledge from advanced to developing economies.
Many economists argue that this transfer of technology may be the primary benefit of foreign direct investment. It is often argued that it is necessary to restrict foreign direct investment in a given industry for national security purposes. This reasoning serves as a justification for prohibitions on investment in defense industries and in other industries that are deemed essential for national security.
Most governments would be concerned if their weapons were produced by companies owned by firms in nations that might become future enemies.
Environmentalists are concerned that the growth of foreign direct investment in developing economies may lead to a deterioration in the global environment because investment is expanding more rapidly in nations that have relatively lax environmental standards. The absence of restrictive environmental standards is one of the reasons for the relatively high rate of return on capital investment in less developed economies. Technology transfer from the developed economies may also result in the adoption of more efficient and environmentally sound production techniques than would have been adopted in the absence of foreign investment.

What do you think? Do you feel that foreign direct investment is beneficial to developing countries?