Foreign Direct Investment (FDI) vs Remittances
Foreign Direct Investment (FDI) and Remittances are two International & Development Economics concepts in AP Economics that students often mix up. Foreign direct investment is when a firm or individual from one country builds or buys business operations in another country. Remittances are the money migrant workers send back to households in their home country, recorded as transfers in the current account. Here is how they compare side by side.
FDI includes building factories, opening offices, or acquiring controlling stakes abroad. It brings capital, jobs, and technology to host countries and is recorded in the financial account of the balance of payments.
For many low and middle-income countries remittances are one of the largest inflows of foreign currency, typically larger than foreign aid and in many years larger than foreign direct investment. They behave differently from those flows: aid is negotiated between governments and investment chases returns, while remittances come from a relative and tend to hold up or even rise when the recipient country hits a recession, a disaster or a currency collapse. Because the money goes straight to families, it mostly funds food, housing, schooling and health rather than public projects. Transfer fees take a real bite, especially on small transfers along thin corridors. In the balance of payments they are a current account credit, not a financial account item, because nothing is lent or owned in return.
FDI vs Remittances: Two Very Different Ways Money Crosses a Border
| Foreign direct investment | Remittances | |
|---|---|---|
| Who sends it | Foreign firms and investors buying or building operations | Migrant workers sending part of their pay to family |
| Who receives it | Companies, project accounts and sometimes governments | Households, directly |
| Where it is recorded | The financial account of the balance of payments | The current account, mostly as personal transfers |
| Obligation it creates | Profits and dividends flow back out in later years | None, a transfer is never repaid |
| Behavior when the recipient country hits trouble | Retreats, because investors postpone risky projects | Holds up or rises, because families need the money more |
| What arrives besides the money | Technology, management, supplier links and access to export markets | Purchasing power for food, school fees, housing and small businesses |
| How it is spread | A few large projects, often in one sector or region | Millions of small transfers across many households |
The same headline total lands in completely different places
Suppose two illustrative inflows of $6 billion each reach the same country in the same year. The first is remittances, spread across 1.2 million households, which works out at $5,000 per household. It arrives without anyone's approval, it reaches people rather than institutions, and it is spent quickly on food, school fees, roof repairs and stock for small shops. The second is foreign direct investment, and it arrives as three projects: a $4 billion mine and two plants of $1 billion each. It reaches three companies, employs a few thousand people directly, and much of it is spent on imported equipment. Now roll the clock forward. If the mine earns a 15 percent return on its $4 billion, that is $600 million a year of profit, and whatever share goes to the parent company leaves the country as investment income, year after year. The remittances create no such claim, because nothing has to be paid back. That is why the two flows sit in different accounts, and why a country with a large migrant workforce can run a long deficit in goods and still find the foreign currency to pay for imports. The account that catches the profit outflow is described at /glossary/current-account.
One buys capacity, the other buys consumption, and both draw fire
Each flow attracts its own complaint. Foreign investment is accused of building enclaves: a mine or an assembly plant with imported machinery, imported managers and a fence around it, buying little locally and booking its profits wherever the tax rate is lowest. When it works, it works through links, which is why host governments bargain for local supplier contracts, training and joint ventures rather than for the headline investment figure alone. Remittances draw the opposite charge, that they pay for consumption instead of factories. That undersells them, since school fees, medicine and a dry roof are investments in people, and the results show up in the health and schooling data summarized at /glossary/human-development-index-hdi. The fair criticisms are different ones. Transfer fees take a real bite out of small sums. A steady inflow of foreign currency can push the real exchange rate up and squeeze exporters, the channel set out at /glossary/dutch-disease. And money arriving dependably from abroad can relieve the pressure on a government that is failing to create jobs at home. What both complaints miss is timing. Investment pulls back when a country looks risky, while transfers from relatives rise at exactly that moment, which makes them the more dependable flow when dependability counts.
Frequently asked questions
What is the difference between FDI and remittances?
FDI is money a foreign firm or investor puts into building or buying business operations in another country, while remittances are money migrant workers send to their families at home. FDI creates a foreign owned asset that pays profits back out over time, and remittances are transfers that are never repaid.
Are remittances part of the current account or the financial account?
Remittances belong to the current account, recorded mostly as personal transfers under secondary income. Foreign direct investment belongs to the financial account instead, because it is the purchase or construction of an asset rather than income or a gift.
Which is more stable, FDI or remittances?
Remittances are usually the steadier of the two, and they often rise when the receiving country runs into trouble, because migrants send more when their families need help. Foreign direct investment follows profit expectations, so it slows or reverses when a country starts to look risky.
Live Exchange Rates graph. Drag the curves, or open the full version.
Get AP Econ exam tips in your inbox
Occasional emails with study tips, new interactive graphs, and exam-season reminders. Free, no spam.
No spam. Unsubscribe anytime. Read our privacy policy.
Keep track of what you have studied
A free EconLearn account adds progress tracking, your quiz history, and achievements. Studying here is free either way, and there is nothing to pay for as a student.
Create a free accountAlready have one? Sign in
Last updated