1.5. Effect on Competition
According to an OECD report (OECD 2002, p.16) the presence of foreign enterprises may greatly assist economic development by spurring domestic competition and thereby leading eventually to higher productivity, lower prices and more efficient resource allocation. Increased competition tends to stimulate capital investments by firms in plant, equipment and R&D as they struggle to gain an edge over their rivals. FDI’s impact on competition in domestic markets may be particular important in the case of services, such as telecommunication, retailing and many financial services, where exporting is often not an option because the service has to be produced where it is delivered.
Julius (1990, p. 97) for example, writes that: “As with trade, increased international flows
of FDI should be encouraged because they bring both global and national benefits. They stimulate growth through more efficient production and they lower prices through greater competition”. And according to an OECD study, “Like trade, foreign direct investment acts as a powerful spur to competition and innovation, encouraging domestic firms to reduce costs and enhance their competitiveness” (OECD, 1998, p. 47).