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Advantages & Disadvantages of FDI for Economic Development II…
Advantages & Disadvantages of FDI for Economic Development II
Hindrance to domestic investment
As it focuses its resources elsewhere other than the investor's home country, FDI can sometimes hinder domestic investment.
In some cases it is argued that MNCs have too much power, because of their size, and so gain large tax advantages or even subsidies, reducing potential government income in developing countries.
Along the same lines, it is argued that MNCs have too much power internationally. Their incomes and size allow them to exert too much influence on policy decisions taken in institutions such as the WTO.
MNCs can provide employment for the developing countries, which may also mean greater education and skill levels. This would improve the skill levels of the workforce in the developing country.
MNCs bring in their own management teams and use low-skilled workers for production while providing no education or training
The government of the developing country may gain tax revenue from the profits of the MNCs, which can be reinvested into infrastructure, public health care and education, leading to increases in economic growth.
This may also occur if MNCs set up in countries with no worker protection laws, and may exploit workers with poor conditions and low wages
Since unemployment is likely to decrease, this also suggests an increase in disposable income. This will lead to greater consumption and thus, economic growth for the developing economy.
MNCs may provide more choice and lower prices for consumers, which, if are available, can allow consumers of the developing country to increase their disposable income and hence lead to greater levels of economic development.
MNCs can improve the infrastructure of the developing country, which can allow for higher standards of living.
Due to their size and decision making power, MNCs may negotiate further decreases in wage levels, reducing the incomes of workers and impacting their standard of living.
MNCs may obtain large market shares and remove revenue from domestic firms.
Government resources may be used to build infrastructure needed by MNCs. Limited government revenue may be directed away from merit goods to the MNC
Certain developing countries may compete with each other to attract the investment of certain MNCs, yet the demands of the MNC may conflict with what the country needs.
If MNCs buy existing companies in developing countries, then they are injecting foreign capital into the developing country's economy.
This can also improve the efficiency of the economy - if the MNCs is buying out a previously inefficient company in the economy.
It is argued that MNCs situate themselves in countries where legislation on pollution is not effective and thus they are able to reduce private costs while creating external costs. Whilst this is good for the MNC it is damaging the environment of the host country
MNCs may sometimes force local businesses to leave the industry if they are not able to compete
MNCs may provide the necessary training and development that will lead to increase skill sets. Eventually, individuals may be able to start up new, competing firms.
Advantages
Disadvantages