FDI Flashcards
Define FDI
Purchase of land, equipment or buildings or the construction of new equipment or buildings by MNCs
What is the FDI benefit in LEDCs
MNCs tend to employ a small number of people in LEDCs —> high wage
MNCs bring technologies of production, managerial services and business practices to LEDCs
How do MNCs benefit in LEDCs
Exploitation of raw materials —> cheaply found in LEDCs
Exploitation of the agricultural potential of a poor country
Use of low wage, non-unionised labour for export processing
Fewer regulations and legal restrictions on the environment, health and safety
What is the FDI effect on balance of payments
Inflows —> financial account as the MNC bring investment funds
Inflows —> goods and services produced by the MNCs may be intended for export and will generate an inflow on the current account
Outflows —> MNCs set up they use an external source of supply for capital goods creating an outflow
Outflows —> repatriated profits
What are the benefits of FDI
Transfer of expertise in finance, management and training
Better access to export markets as local managers can learn how to operate in such markets by training from MNCs
Provision of employment
Development of support industries to supply and service the MNCs
Technology transfer
Tax revenue gained by the gov from corporation tax
Plugs the savings gap between desired investment and domestic savings available for investment
What are the problems of FDI
Stifle domestic competition so growth of domestic firms decline
MNCs use their economic power to influence gov policies in directions unfavourable to development (e.g. employment contracts, minimum wage laws and trade unions)
Corporation tax rates kept low (ensure FDI and MNC stay) —> lower tax revenue —> less money for development projects
MNCs engage in transfer pricing
Tech transfer undertaken by MNCs are largely capital intensive —> unemployment not reduced by much
Profits repatriated and not invested into the LEDC
MNCs produce inappropriate goods for citizens of LEDCs and are only consumed by a wealthy minority —> resources are allocated to socially undesirable products which increase inequality
What is transfer pricing
MNCs inflate price they pay in intra corporate trade for their intermediate products
This reduces profits in high tax nations and increases profits in the low tax country
