Chapter 20.5 Flashcards
What is foreign direct investment?
Investment by firms based in one country (the home country) in productive activities in another country (the host country) with control of at least 10% of the firm in the host country
What is the name of a firm that undertakes FDI?
Multinational corporation (MNC)
Who accounts for vast majority of world’s FDI?
Developed countries
How have these MNCs grown?
By using joint ventures and strategic alliances with firms in developing countries, which has resulted in large number of FDI in developing countries
What is inward FDI?
The country in question attracts FDI funds from foreign multinationals
What is outward FDI?
Occurs when the country in question uses FDI in a foreign country
Why do MNCs expand into developing countries?
Cheaper production costs, economies of scale, access to natural resources, increased sales revenue, avoiding trade barriers, logistical reasons, financial incentives
How can MNCs benefit from cheaper production costs?
Many MNCs have operations in developing countries in order to exploit lower costs of production
How can MNCs benefit from economies of scale?
By operating on a larger scale due to a larger customer base
How can MNCs benefit from access to natural resources?
Many developing countries are well-endowed in natural resources, which can then be exploited.
How can MNCs benefit from increased sales revenue?
Access to fast growing economies with large populations, presents enormous opportunities for MNCs.
How can MNCs benefit from avoiding trade barriers?
By locating within the developing countries, the multinational corporation is able to avoid trade barriers such as tariffs, quotas and administrative obstacles
How can MNCs benefit from logistical reasons?
MNCs locate overseas to reduce delivery times to customers in developing countries and emerging markets
How can MNCs benefit from financial incentives?
In order to attract FDI, the government of developing countries often offer MNCs incentives to locate in their country, including tax rebates, grants, subsidies and cheaper rents.
What are the characteristics of developing countries that attract FDI?
-Low-cost factor inputs – In many developing countries, an abundant supply of labor means relatively lower labor costs. In addition, many developing countries are rich in natural resources.
-A regulatory framework that favors profit repatriation – laws and regulations are usually less strict in developing countries, thereby allowing MNCs to be exempt from directives such as minimum wage laws and safety regulations.
-Favorable tax laws – As developing countries often compete to attract FDI, favorable 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?
-FDI is a major source of national income for Less Economically Developed Countries (LEDCs). In the long run, FDI in LEDCs helps to shift both the long-run aggregate supply and aggregate demand curves to the right.
-Higher national income, resulting from FDI, can help LEDCs to close their saving 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.
-FDI allows the transfer of technology and more efficient work practices from developed countries to LEDCs
-FDI and direct rivalry from MNCs can force domestic producers in the host country to become more efficient and competitive
What are the disadvantages of FDI?
-FDI from large MNCs makes domestic rivals less competitive due to the advantages enjoyed by the MNCs
-In most cases, the profits generated by MNCs are repatriated to their home country rather than reinvested to further improve the facilities and infrastructure in LEDCs
-Growing presence and power of MNCs creates a loss in the cultural, political and economic identity of LEDCs in favor of economically developed nations
