Page 96 - Azerbaijan State University of Economics

THE JOURNAL OF ECONOMIC SCIENCES: THEORY AND PRACTICE, V.80, # 1, 2023, pp. 94-105

• Crowding out domestic investment: FDI may also crowd out domestic investment,
as local firms may find it difficult to compete with foreign firms that have access
to more resources and better technology. (Jude, 2015).

• Repatriation of Profits: Foreign firms may repatriate profits earned in the host
country, which can lead to capital outflows and reduce the availability of resources
for domestic investment.
• Environmental Degradation: FDI can also have negative environmental impacts,
such as pollution and resource depletion if it is not managed carefully.

• Political Risk: FDI can be sensitive to political risks, such as changes in
government policy, which can create uncertainty for investors and reduce the
attractiveness of the host country as an investment destination.

Overall, FDI can bring significant benefits to developing countries, but policymakers
need to be mindful of the potential drawbacks and take steps to manage the risks
associated with foreign investment.

The Challenges of Foreign Direct İnvestment in Developing Countries
FDI can bring various benefits to developing countries, such as increased employment
opportunities, technology transfer, and access to new markets. The challenge for
developing countries is to develop a well-calibrated and, preferably, unique
combination of factors determining FDI location and to match those determinants with
corporations' strategies. (Mallampally & Sauvant, 1999). However, attracting and
benefiting from FDI can be challenging for developing countries due to a variety of
reasons. Here are some of the main challenges:

Political instability and security risks: Developing countries that experience political
instability and conflict can deter foreign investors. Investors may be hesitant to invest in
a country where there is a risk of political turmoil or violence. Political instability can lead
to a lack of policy consistency, changing regulations, and unpredictability, which can
create a hostile business environment. (Erkekoglu & Kilicarslan, 2016).

Poor infrastructure: Infrastructure is a critical factor in attracting foreign investment.
A lack of infrastructure, such as transportation, energy, and communication networks,
can make it difficult for investors to operate efficiently. Poor infrastructure can lead
to higher costs and delays, affecting productivity and profitability.
Limited access to finance: Limited access to finance is a significant challenge for
many developing countries. Investors require access to financing to expand their
operations, invest in new technologies, and manage risks. Developing countries with
limited financial markets and weak regulatory frameworks may face difficulties in
accessing the necessary funds. (OECD,2002).

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