Foreign direct investments (FDI) can have a major positive effect in regional areas in both economy and social aspects. In fact, foreign direct investments could be a big factor when looking to help economies for less developed parts of the world. It’s not just a big advantage for the investing companies who, of course, get a good source of cheaper labour, it might even have a bigger advantage for the region where investors invest. Two of the major effects that foreign direct investments have is that a. the productivity in that (part of a) country increases significantly and that b. it has a high positive as well on the labour market (in the sense that unemployment will drop).
The increase of productivity of a single part of the country will lead to increase in productivity in the entire country. This because the increase of productivity is a sort of multiplier-effect: a foreign company decides to invest in a country, the local companies and employees will suddenly have more competition, which improves the productivity. And seeing as how all companies are linked to each other (suppliers, intermediates, etc.) in time all companies will increase productivity, just to keep up the with the competition. The second big advantage of foreign direct investments is that it will affect the labour market as well. And not just in the sense that the unemployment will drop. Of course, this will be the first change in the regional labour market: the unemployment will drop significantly ones a big company decides to move into town. But it will also increase the education level of the regional area because companies have a big demand for skilled labour. It will also that new people will move to the area because of economic reason, which only means that there will be more jobs available in the regional economy. This is the multiplier effect: one big investment, but it keeps getting multiplied by other companies.
A good example of this effect is the region of Slaskie in Poland. From the 1970’s on the region has been trying to attract foreign investors after one major investment from Fiat there. Since the 1990’s on there have been many investors in the area of Slaskie following the success of Fiat there. Now the entire is industry is based on manufacturing companies and especially those of cars. The area has one of the best infrastructure in the entire of Poland, currently they have 42 higher education schools with a total of 200.000 students and the car industry has grown to a total of 44 companies. And all of this because of one foreign direct investment in the region: this is how big the consequences of one investment can get.
– Study on FDI and regional development, by Copenhagen economics in cooperation with Professor Magnus Blomström. Final report, 2006.