Economic development necessitates making investments in various economic sectors; without such investments in infrastructure and superstructure of an economy, one cannot expect the development of employment opportunities, production and economic welfare. Therefore, along with abundant human force and natural resources, capital is also needed for economic prosperity. Foreign direct investment (FDI) has long been a controversial issue in international economics. In recent years, the flow of such investments into developing nations has rapidly increased. It is believed that FDI – contrary to other types of capital transfer – has the potential not only to provide the required forex resources, but to be a means for technology transfer, integration into the world’s economy, encouraging healthy competition, allowing easier access to export markets, improving managerial and marketing practices and training human resources. That’s why more and more developing nations include FDI in their economic reform programs. Previously, many of these countries were not willing to open their doors to FDI – which is made mainly by multinational companies – because they believed these companies only aimed to loot their national wealth and threaten their sovereignty and national independence, while escalating their economic dependency. A major change has now occurred in the way developing nations look at FDI and its potentials. They now try to remove any obstacles in the way of foreign investments. Even such countries as China and India – which were staunch opponents of FDI – now endeavor to pave the way for it.

Positive Impacts: What are the effects of FDI on the economy of the host country?
Economists and experts at the international financial organizations gradually found out that FDI could help the growth of the host country’s economy through the following ways:
1 . Transfer of forex to the host country: Many developing countries have forex problems in their economic development programs. FDI, by brining in some part of the needed forex, can encourage economic growth. According to a regression model developed by Chung Chen relating to the years 1968-90 in China, FDI has a significant and positive effect on a country’s GNP a year after it is made. Also, there is a stronger relation between domestic savings and GNP.
2. Transfer of technology: With their investments, multinational companies transfer modern machinery and equipment to developing countries.
3. Encouraging exports: Since foreign investors, mainly multinational companies, are well-informed about international markets, or have a global distribution network of their own, they can facilitate and promote the host country’s exports.
4. Increasing employment, training and improvement of workers’ skills and transfer of managerial knowledge to the host country.
5. Raising the domestic production and improvement of quality: FDI encourages domestic manufacturers to produce intermediate goods needed for foreign companies, thus making them enter into a competition with foreign manufacturers and improve their products’ quality.
6. Penetration of modern technology and management into other economic sectors.

Negative Impacts:
1. In some countries, FDI has resulted in larger imports of raw materials and spare parts into the host country, while not considerably affecting the exports positively. This has led to an increase of deficiency in the balance of payments and limitation of forex resources of the host country. Negative effects have also included raising foreign debts in some countries.
2. Most research on the impact of FDI has shown it has intensified inequality in distribution of income in some areas.
3. Another criticism which is made against FDI is that in many countries, it has not served as a complement for the domestic savings, but has replaced them.
4. It is said that multinational companies do not usually follow long-term objectives for their investments in developing countries. These companies perform only the last stage of production process – including packaging or assembling – in developing nations in order to escape the import quota, approved by the Organization for Economic Cooperation and Development (OECD) member countries for the countries of origin. The companies only transfer simple process to less developed nations for getting the country of origin certificate from the new country, and export their commodities to the OECD members. These companies create little value added, and as soon as they face a growth in wages, they transfer their capital to another country.
5. Despite a good performance in the field of export and boosting employment, FDI creates a pretty meager forex income for the host country. It is often said that foreign firms establish little links with the host economy, because most of their production inputs are imported.
6. Finally, foreign companies are not very willing to transfer modern technology to the host country.

Also, it is advisable that in investment contracts, due attention be paid to the following issues: providing more production outputs from domestic industries, utilizing modern technology and domestic manpower at all levels, and training human resources involved in the production process.