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The connection between foreign direct investment and economic growth is based on the benefits which accrue to a host country by virtue of the investment by foreign companies. An analysis of the link between the foreign direct investment and economic growth may be approached from the physical or infrastructural benefits as a result of the relationship. It may also be studied from the angle of the inflow of technology and the inflow of human capital in relation to the benefit to the economy.
A direct link between foreign direct investment and economic growth is the contribution of such investments to the infrastructural development of the host or local country. This type of economic benefit is most apparent in less developed countries than in more industrialized nations. An example of this link between foreign direct investment and economic growth can be seen in an oil company from an industrialized nation that invests directly in a less developed country with an abundance of crude oil. The investment could be in the form of the construction of sophisticated refineries that the host country probably would not have managed on its own. When the refineries are fully functional, they will serve as a means for the extraction and packaging of crude oil for sale on the international market as well as a source of income for the host country.
Another connection between foreign direct investment and economic growth is derived from the benefit that the host country derives from incoming technology. When companies invest in a local economy, they may introduce technology that is more advanced than what obtains in the host country. Such superior technology may indeed be part of the business strategy of the investors who may choose a country with a deficiency in the technology they have as a part of minimizing competition. If this is the case, the host country can use the technology to its own economic benefit.
An aspect of foreign investment is the human capital that comes with such an investment. When a company scouts for international markets to invest in, part of the business strategy is to acquire excellent human capital to help establish the subsidiary. For instance, if a company decides to open a branch in another country, it will look for some of its best employees with proven track records to manage the place. It will also employ the most competent employees with the best human capital to work in the new branch. Such an inflow of human capital is also economically beneficial to the host country since the local staff can improve their human capital, which will continue to serve as a benefit to the country even if the company stops operation in the local country.
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