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How can foreign direct investment(FDI) impact economic growth and/or…
How can foreign direct investment(FDI) impact economic growth and/or economic development
Reasons
Regulation are much less severe than those in developed countries which can make it easier for companies to set up and also decrease the cost of production
Cost of labour are much lower than in developed countries
Some countries represents huge and growing markets. MNC will have a better access to the large number of potential customers
Countries may be rich in natural resources. MNC have the necessary technology and experts to extracts those resources
Advantages
Increased employment and earnings will have a multiplier effect on the host economy and will stimulating growth
Host government may gain tax revenue and this can be used to gain more growth by investing in infrastructure or other thing that can promote economic development
Allow greater access to research and development, technology and marketing expertise
Infrastructure may improve whether by the help of MNC or incentive to the government in attracting MNC
Provide employment which may also provide education and training thus improve the skill level of workforce
MNC may buy existing companies and they will inject foreign capital thus increasing the aggregate demand.
FDI helps to fill saving gap which is necessary for economic growth
MNC may provide more choice, lower prices for the consumers and goods that are not available domestically
MNC can lead to more efficient allocation of world resources
Disadvantages
MNC may only aim to strip the resources available and leave after fully extracting it. The host country may not be able to gain profit from the resources
While MNC may provide employment, they mostly bring their own team from abroad. Only low skilled workers are hired for basic production, thus providing no education or training
MNC use capital intensive production to make use of the abundant natural resources. This will not improve the employment in the host country
MNC have to much power because of their size and this make them gain high subsidies or large tax advantage by the government. This in turn will reduce the potential government income. MNC also exert to much influence in many institutions such as the WTO
When MNC are buying domestic firms, they mostly paid in shares/stocks. This mean that actual money will not be used in the economy of the developing country.
MNC practice transfer pricing where they sell goods and services from one division of their company to another in a different country. This was done to take advantage of the different tax rates in different countries. This has resulted in the losing of potential tax revenue for the developing countries.
MNC may transfer back their profit out of the country back to their country of origin
MNC mostly choose countries where the legislation on pollution and labour laws. This is to reduce their cost but create external costs. The cost that MNC have are decreases but the damage to the environment will increases. Workers also may be exploited in terms of low wage and poor working conditions
FDI is a long term investment by private multinational enterprises/corporations (MNE or MNC) in countries overseas. This occurs in two way, either by build new plants or expand their existing facilities in foreign countries(greenfield investment ), or they merge with or acquire existing firms in foreign countries