Home/Essays Examples/Economics/The Foreign Direct Investment Effects

The Foreign Direct Investment Effects


Foreign direct investment is one of the major strategies for international economic integration. Over the past decade, foreign direct investment has grown significantly as a form of international capital transfer. Various scholars and economists have defined the concept in varied ways. For instance, foreign direct investment has been defined as “the cross-border expenditures to acquire or expand corporate control of productive assets” (Froot, 2009). Foreign direct investment also refers to “an investment that is made to acquire lasting or long-term interest in enterprises operating outside the economy of the investor” (Kolodkin, 2012).

In general, the concept of foreign direct investment refers to an investment made by a foreign entity in another economy in order to enable the foreign entity to gain long-term relationship with the host country. This paper examines the effect of foreign direct investment on the source and host country, and in the world. The main objective of this essay is to determine the relevance of foreign direct investment by examining its effect on the host and source country, and in the world.

The Effect of Foreign Direct Investment on the Host Country

Several research findings indicate that foreign direct investment is highly beneficial to the host country. Foreign direct investment is a major source for external finance and capital (OECD, 2013). Therefore, economies with limited capital are able to access finances beyond their borders. Foreign direct investment also facilitates transfer of technology from the developed world to the developing countries (OECD, 2013). In such a case, the host country can be able to advance technologically by gaining skills and knowledge from foreign investors.

Bahrain is one of the countries in the Arab Gulf that has reaped the benefits of foreign direct investment in its economy. Bahrain has adopted a number of policies, which aims at attracting foreign direct investment. Bahrain has also maintained close ties with the United States of America in relation to foreign direct investment. This follows the discovery of oil in the country by the US Standard Oil Company (Al-Khalifa, 2010). Therefore, the United States of America has continued to play a major role in Bahrain’s economy. It accounts for most of the foreign direct investments made in Bahrain. For instance, in May 2001 the United States of America signed a Bilateral Investment Treaty with the Bahrain government (Al-Khalifa, 2010). In 2006, both countries got into a Free Trade Agreement.

Due to foreign direct investment, Bahrain’s economy has been transformed drastically. Initially, the country had a subsistence economy that depended on fishing, pearl trading, and farming (Al-Khalifa, 2010). However, due to the discovery of oil in the country and the subsequent foreign direct investments, Bahrain has transformed into a modern state. The country has attained major infrastructure development and improvement in the banking industry, which comprise some of the United States of America’s biggest banks. Consequently, the country has managed to develop its private sector (Al-Khalifa, 2010).

In Bahrain, foreign direct investment has had a great impact on capital accumulation in the country. For instance, in 2000 and 2004, foreign direct investment stock was 74% and 70% of the country’s Gross Domestic Product respectively (OECD, 2013). In 2011, the value of foreign direct investment was 780, 851,100 US dollars whereas the net inflows of foreign direct investment in Bahrain stood at 0.68 (Al-Khalifa, 2010). In 1996, the country managed to attain the highest value of 33.57 (Al-Khalifa, 2010). The graph below shows the trend in foreign direct investment in Bahrain between 2001 and 2011.

The trend in foreign direct investment in Bahrain between 2001 and 2011.
The trend in foreign direct investment in Bahrain between 2001 and 2011.

These statistics show that the government of Bahrain has continued to attract a lot of foreign direct investment, which has consequently contributed to a major growth in Bahrain’s economy.

The Effect of Foreign Direct Investment on the Source Country

Most countries especially from the developed world often use foreign direct investment in order to advance their foreign policies. Through foreign direct investment, the source country often finds an opportunity to develop a long lasting relationship with the host country (Froot, 2009). Therefore, the source country sometimes influences decision-making and policies in the host country. This provides room for the source country to advance its ideas on the host country.

The United States of America is one of the major foreign direct investors in the world. A good number of American companies and Multinational Corporations have investments in several parts of the world. For instance, a number of American companies operate in Bahrain. Some of these companies have operations in the oil industry, banking sector, and the manufacturing industry (Al-Khalifa, 2010). Through direct foreign investment in Bahrain, the United States of America has managed to create new avenues for employment opportunities to its citizens. Additionally, foreign direct investment enables the source country to have market access beyond its borders (OECD, 2013).

For instance, the United States of America has been able to gain access to markets outside its borders. This is because the country has been able to establish friendly relations with other economies through foreign direct investments. For example, the government of Bahrain has had a liberal approach to foreign investors such as the United States of America (Al-Khalifa, 2010).

The Effect of Foreign Direct Investment in the World as a Whole

Foreign direct investment continues to be sought by most developing countries. The major reason why most developing countries seek to attract foreign direct investment is to enable them accumulate capital that they can be use to undertake development projects in their countries (Froot, 2009). However, the developed countries have also shown great interest in making foreign direct investments. Therefore, one of the major effects of foreign direct investment in the world is that it has facilitated the process of globalization. Through foreign direct investments, different regions of the world have become interconnected through trade relations in the form of foreign investments (Froot, 2009). Thus, the world continues to evolve into a global village. This is crucial because increased interactions between people from different parts of the world help to promote peace and co-operation.


From the above discussion, it is evident that foreign direct investment not only benefits the host country but also the source country. For instance, the Bahrain economy has had significant transformation because of foreign direct investment in the country by larger economies such as the United States of America. On the other hand, the United States of America has also gained in the process. Generally, foreign direct investment facilitates the process of globalization in the world and promotes re-distribution of capital to various regions of the world.


Al-Khalifa, A. L. (2010). Foreign Direct Investment in Bahrain. Florida: Boca Raton. Web.

Froot, K. (2009). Foreign Direct Investment. Chicago: University of Chicago Press. Web.

Kolodkin, B. (2012). What is Foreign Direct Investment? London: Broadway Publishers. Web.

OECD. (2013). OECD Factbook 2013: Economic, Environment and Social Statistics. Web.