4.5 The Role Of Foreign Direct Investment Flashcards
What is foreign direct investment?
FDI refers to the long term capital expenditure of multinational companies in overseas countries.
What are multinational corporations?
MNCs are businesses that operate in two or more countries ie. they have operations outside of their home country.
Why can FDI help improve economic development in LEDCs?
FDI is the money devoted by MNCs to business operations abroad. Globalisation and the promotion of free international trade by the WTO has encouraged a significant increase in foreign direct investment in LEDCs.
Why do developed countries account for the last majority of the worlds FDI?
Because the largest MNCs are from the developer countries. MNCs have production plants or service operations in overseas countries. These MNCs have grown by using joint ventures and strategic alliances with firms in LEDCs this has resulted in a large increase in FDI in LEDCs.
What is the amount of FDI dependent upon?
FDI expenditure is highly dependent on changes in the state of the world economy. During economic booms FDI tends to rise significantly as firms believe they can increase their profits by expanding overseas.
What are the reasons MNCs expand into LEDCs?
Cheaper production costs Economies of scale Access to natural resources Increased sales revenue Avoiding trade barriers Logistical reasons Financial incentives
Why do MNCs expand into LEDCs for cheaper production costs?
Many MNCs have operations in LEDCs in order to exploit lower costs of production.
Why do MNCs expand into LEDCs for economies of scale?
By operating on a larger scale due to a larger customer base MNCs are able to exploit economies of scale thereby reducing their unit costs of production. By operating in overseas markets MNCs are also able to achieve risk bearing economies.
Why do MNCs expand into LEDCs for access to natural resources ?
MNCs are keen to expand into LEDCs because many LEDCs are well endowed in natural resources which can then be exploited.
Why do MNCs expand into LEDCs for increased sales revenue?
Access to fast growing economics with large populations present enormous opportunities for MNCs.
Why do MNCs expand into LEDCs for avoiding trade barriers ?
By locating within the LEDCs the MNC is able to avoid trade barriers such as tariffs, quoits and administrative obstacles.
Why do MNCs expand into LEDCs for logistical reasons?
MNCs locate overseas ro reuse delivery times to customers in LEDCs and emerging markets.
Why do MNCs expand into LEDCs for financial incentives?
In order to attract FDI the governments of LEDCs often offer MNCs incentives to locate in their country including tax rebates, grants, subsidises and cheaper rents.
What are the characteristics of LEDCs that attract FDI?
Low cost factor inputs - in many LEDCs an abundant supply of labour means relatively lower labour costs. In additions many LEDCs are rich in natural resources thus MNCs are attached to establish themselves insect countries.
A regulatory framework that favours profit repatriation - laws and regulations are usually less strict in LEDCs thereby allowing MNCs to be exempt from directives such as minimum wage laws and safety regulations.
Favourable tax rules - as LEDCs often compete to attract FDI favourable tax rules are granted to MNCs that locate in their country such as low rates of corporation tax or delayed tax payments.
What are the advantages of FDI for LEDCs?
Major source of national incomes for LEDCs far more stable than financial aid, with long term benefits for LEDCs in the long run FDi in LEDCs helps to shift both the LRAS and AD curves to the right.
Higher national income resulting from FDI can help LEDCs to close their savings gap. As the level of savings in the LEDC increases more funds become available for investment in the economy with long term benefits to the country.
The profits generated form he investment of MNCs in an LEDC contribute to the country’s tax revenues.
FDI allows the transfer of technology and more efficient work practices from MEDCs to LEDCS.