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What Are the Costs and Benefits of Fdi?

In: Business and Management

Submitted By canerymz
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Host-Country benefits
• Resource-Transfer Effect: FDI can make a positive contribution to a host economy by supplying capital, technology, and management resources that would otherwise not be available and thus boost that country’s economic growth rate.
• Employment Effects: FDI brings jobs to a host country that would otherwise not be created there. It may be direct and indirect. When a foreign multinational enterprise employs a number of host-country citizens, direct effects arise. On the other hand, when jobs are created in local suppliers as a result of investment and when jobs are created because of increased local spending by employees of the multinational enterprise, direct effects arise.
• Balance-of Payments Effects: A country’s balance-of-payments accounts track both its payments to and its receipts from other countries. Governments normally are concerned when their country is running a deficit on the current account of their balance of payments. The current account tracks the export and import of the goods and services. So governments prefer surplus rather than deficit. There are two ways in which FDI can help a country to see a current account surplus. The first one is if the FDI is a substitute for imports of goods and services, the effect can be to improve the current account of the host country’s balance of payments. The second potential benefits arise when the multinational enterprise uses a foreign subsidiary to export goods and services to other countries.
• Effect on Competition and Economic Growth: When FDI takes the form of a Greenfield investment, the result is to establish a new enterprise, increasing the number of players in a market and thus consumer choice. In turn, this can increase the level of competition, thereby driving down prices and increasing economic welfare of consumers.
Home-Country Benefits
The benefits of FDI to the home country arise from three sources:
• First, the home country’s balance of payments benefits from the inward flow of foreign earnings.
• Second, benefits to the home country from outward FDI arise from employment effects. As with the balance of payments, positive employment effects arise when the foreign subsidiary creates demand for home-country exports.
• Third, the benefits of FDI arise when the home-country multinational enterprise learned valuable skills from its exposure to foreign markets that can subsequently be transferred back to the home country.
Host-Country Costs
• Adverse Effects on Competition: It is a problem when subsidiaries of foreign MNEs may have greater economic power than indigenous competitors. The foreign MNE may be able to draw on funds to subsidize its cost in the host market. This may make the market monopolized by driving some companies out of business. This could raise prices above a lot.
• Adverse Effects on the Balance of Payments: First, set against the initial capital inflow that comes with FDI must be able the subsequent outflow of earnings from foreign subsidiary to its parent company. Second cost arises when a foreign subsidiary imports a substantial number of its inputs from abroad which results in a debit on the current account of the host country’s balance of payments.
• National Sovereignty and Autonomy: The concern is that key decisions that can affect the host country’s economy will be made by a foreign parent that has no real commitment to the host country, and over which the host country’s government has no real control.
Home-Country Costs The home-country balance of payments may suffer in three ways.
• First, the balance of payments suffers from the initial capital outflow required to finance the FDI.
• Second, the current account of the balance of payments suffers if the purpose of the foreign investment is to serve the home market from a low-cost production location.
• Third, the current account of the balance payments suffers if the FDI is a substitute for direct exports.…...

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