7.4: Benefits and Costs of FDI Flashcards
What are the main benefits of inward FDI for a host country?
The main benefits of inward FDI for a host country include
resource-transfer effects,
employment effects,
balance-of-payments effects,
and effects on competition and economic growth.
What are the resource-transfer effects of inward FDI?
Inward FDI can transfer valuable resources such as capital, technology, and management skills to a host country that may not have been available otherwise. This can contribute to the host country’s economic growth.
How does inward FDI contribute to the availability of capital in a host country?
Many multinational enterprises (MNEs) have access to financial resources that host country firms may not have, either from internal sources or through easier access to capital markets.
This can benefit the host country’s economy by providing additional investment capital.
What role does technology transfer play in the benefits of inward FDI?
Technology transfer is a significant benefit of inward FDI. Multinational firms often transfer technology to the host country, which can stimulate economic development and industrialization.
This technology can be related to production processes or incorporated into products.
What evidence supports the idea that FDI leads to technology transfer?
Research indicates that multinational firms often transfer significant technology when investing in a foreign country. Studies have shown that foreign firms can increase labor and total factor productivity in host country firms they acquire, suggesting technology transfer.
Additionally, foreign investors often invest in research and development (R&D) in the host countries, indicating technology-related activities.
How can foreign management skills acquired through FDI benefit the host country?
Foreign managers with advanced management techniques can improve the efficiency of operations in the host country, whether through acquisitions or greenfield developments.
This can have positive effects on the overall efficiency of the host country’s firms.
Additionally, there can be beneficial spin-off effects, as local personnel trained by foreign MNEs may establish indigenous firms or stimulate improvements in local suppliers, distributors, and competitors.
What are the employment effects of inward FDI in a host country?
Inward FDI in a host country can have both direct and indirect employment effects.
Direct effects occur when a foreign multinational enterprise (MNE) employs host country citizens.
Indirect effects occur when jobs are created in local suppliers due to the investment and when jobs result from increased local spending by MNE employees.
Indirect effects are often significant and may equal or exceed direct effects.
Can all “new jobs” created by FDI be considered net additions to employment?
Not necessarily. Some argue that the net gain in employment from FDI may be offset by job losses in local firms, particularly in industries where foreign-owned firms compete with local firms, potentially leading to substitution effects.
The net gain in employment can vary based on the specific circumstances and industries involved.
How do acquisition-based FDI and greenfield FDI differ in terms of employment effects?
In the case of acquisition-based FDI, where a foreign firm acquires an established enterprise in the host country, the immediate effect may involve reducing employment as the multinational restructures the acquired unit to improve efficiency.
However, research suggests that once the initial restructuring period is over, enterprises acquired by foreign firms tend to increase their employment base at a faster rate than domestic rivals.
How can FDI affect competition in a host country?
FDI can increase competition in a host country by introducing new players into the market, particularly when it takes the form of a greenfield investment.
This increased competition can lead to lower prices, greater consumer choice, and improved economic welfare for consumers.
What are some potential long-term results of increased competition due to FDI?
Increased competition stimulated by FDI can lead to various long-term benefits, including higher productivity growth, product and process innovations, and greater overall economic growth in the host country.
How does FDI affect competition in service industries, such as telecommunications?
In service industries where exporting is often not an option, FDI can be a significant driver of competition.
For example, the liberalization of telecommunications markets through FDI in many countries led to increased competition, stimulated investment in network modernization, improved service quality, and lower prices.
What are three costs of FDI that concern host countries?
What are three costs of FDI that concern host countries?
A5: Three costs of FDI that concern host countries include adverse effects on competition within the host nation, adverse effects on the balance of payments, and the perceived loss of national sovereignty and autonomy.
These costs should be weighed against the benefits when formulating FDI policies.
What is one concern host governments may have regarding FDI and competition?
Host governments may worry that foreign MNEs, especially those part of larger international organizations, could use their economic power to subsidize costs in the host market, potentially driving indigenous competitors out of business.
This concern is more significant in countries with fewer large domestic firms, particularly less developed countries.
How might a foreign MNE monopolize a market in the host country?
A foreign MNE could potentially monopolize a market in the host country by driving indigenous competitors out of business through cost subsidization.
Once the market is monopolized, the foreign MNE might raise prices, harming the economic welfare of the host nation.
