According to classical economic theory, foreign investment is wholly beneficial to the host economy. In other words, pursuant to the classical economic theory, it is the economy where the investment is made that benefited wholly from the investment. What are the reasons upon which classical economic theory is based?
Do you believe that foreign investment is wholly beneficial to the host state? Those who reject the theory argue that the existence of capital in a host country soaks local capital. Thus, the inflow of capital to the host state is like a big fish that swallows a small one. Hence, the local capital that would be used to invest could not be invested. What is more, foreign investors will export the high profits obtained from the investment to their home state.
Therefore, the capital will benefit the shareholders who are foreigners. In short, the justification that foreign investment is wholly beneficial to the host state on the basis of capital flow is rejected.
Do you agree that foreign investment is wholly beneficial to Ethiopia by transferring technology?
The fact that foreign investment transfers technology could not be denied. However, foreign investors may transfer technology that is outdated. Foreign investors may need to use a technology that is already not up to date. They may not have the chance to use the outdated technology in their country because it may be dangerous to the environment, or it may not be efficient. In addition, the technology used by foreign investors may be capital intensive; using such a technology may be expensive. Further, the technology may be unsuitable to developing countries, for example, the goods that are produced may be outdated, i.e., they are replaced by other goods or products based on newer technology. Thus, the product could not be exported because it is replaced. It cannot bring foreign exchange to the host state. Sometimes the technology may be new and the products may be new to the society of the host state. In this case, the consumers may develop or not tastes to luxury goods.
Accordingly, the unemployment problem that exists in a host state will be solved.
No doubt that foreign investment creates a new job. However, the fact that it creates a new job opportunity should not be taken as a benefit only to the host state. The foreign investor is highly beneficial from the creation of employment because labour is usually not expensive. Rather, the workers will not be fully paid, or the rate of wages is very low that is not commensurate with the service rendered by the workers.
Do you agree with this?
Transfer of managerial skills to local personnel is illusory because the foreign investor do not allow higher managerial positions such as departmental head for local professionals. Therefore, local personnel who are employed cannot acquire new skills.
… that a greater flow of foreign direct investment brings substantial benefits to bring on the world economy and on the economies of developing countries in particular, in terms of improving the log term efficiency of the host country through greater competition, transfer of capital, technological and managerial skills and enhancement of market access and in terms of the expansion of international trade.
What is more, the classical theory also provides a policy basis for the formulation of many documents that relate to international as well as national laws on foreign investment.
Nevertheless, strong criticism has been directed against this theory. It is argued that the flow of resources to a host country does not bring about the development of the state. Foreign investment only benefits the elites. It also leads to unequal development within a state because the elites benefit while the large group of the society is exploited by the foreigners. Thus, another theory has been developed with the intent of providing another reason as justification for foreign investment.