How Foreign Direct Investment Shapes Economic Progress and Employment in Developing Countries

Foreign Direct Investment (FDI) plays a crucial role in influencing the economic paths of developing nations, acting as a catalyst for progress and employment. By injecting capital, technology, and expertise, FDI can drive industrialization, boost productivity, and create jobs. Its impact is shaded and reliant on structural factors in host economies.

Economic Progress: FDI drives economic progress by filling capital gaps and fostering technological advancements. In 2023, global FDI hit $41 trillion, boosting industrial growth in India, Mexico, and Brazil with 20% investment gains. Middle-income countries, in particular, benefit significantly: A 1% FDI rise boosts GDP by 9.3% in middle-income countries through larger production and technology transfers. Though, in 2024, global FDI experienced a decline, with some reports indicating a fall of 2% to $1.3 trillion.

However, the link between FDI and growth is not automatic. The World Bank notes that FDI’s effectiveness centers on complementary factors like human capital and financial insight. Participation in global value chains strengthens FDI’s impact by helping developing nations join high-productivity sectors, though weak skills limit value-added roles.

Employment: Greenfield projects like new factories directly create jobs through FDI, while spillovers to domestic firms generate additional employment. In Vietnam, FDI-driven enterprises outperform local firms in creating formal sector jobs, helping shift workers from informal, low-productivity roles.

However, FDI’s job impact varies: mergers may cut jobs, and automation boosts productivity but often lowers labor demand. Sectoral focus also matters. Renewable energy and tech industries attract high-value FDI, whereas labor-intensive manufacturing faces risks from automation and shifting trade policies. For example, U.S. tariffs redirected export-oriented FDI from China to Southeast Asia and Mexico, altering regional employment patterns.

Challenges and Risks: Although FDI offers opportunities, overreliance poses risks, as geopolitical tensions, protectionism, and supply chain disruptions can undermine its stability. Additionally, weak absorptive capacities such as inadequate infrastructure or skills can limit spillover benefits, tricking economies in low-value activities.

Policy Requirements: To maximize FDI’s benefits, developing nations must prioritize human capital development, regulatory transparency, and infrastructure investment. Countries like Guyana, leveraging oil discoveries to attract FDI, highlight the importance of sectoral directing and governance. Meanwhile, Vietnam’s success in formal sector job creation highlights the need for policies that encourage greenfield investments and domestic linkages.

In essence, FDI remains a vital but complex instrument for development. Its potential to elevate economies depends on strategic integration into global value chains, supportive institutions, and equitable growth policies ensuring that inflows translate into sustainable progress for host nations.