From attraction to anchoring of FDI: the role of financial innovation in reinvesting profits

Abstract

Foreign direct investment is most often examined through entry decisions, location advantages, and the aggregate volume of flows received by host economies. This perspective remains useful, but it leaves aside a decisive question: what happens to the profits generated by foreign affiliates once they are established in the host economy? This article develops a conceptual framework linking financial innovation to the reinvestment of foreign direct investment earnings. Reinvested earnings are therefore understood as a post-entry decision, reflecting investor confidence, the local anchoring of the affiliate, and the willingness to continue expanding within the host country. Drawing on the literature on FDI, financial development, financial innovation, digital finance, and host-country investment conditions, we argue that financial innovation may support reinvestment through four main mechanisms: the reduction of transaction costs and operational frictions, the improvement of liquidity and cash-flow management, access to complementary finance, and the strengthening of financial confidence. The article proposes an analytical framework intended to guide future research, particularly in emerging and developing economies, where the challenge is no longer only to attract FDI, but also to retain and locally enhance the profits it generates.