The Problem Statement
Imagine you are in charge of development of a developing economy and were approached by a multinational corporation interested in locating in your country.
Identify some of the benefits and some of the costs to the host country from the allowing the multinational corporation to locate to a country with a developing economy. Discuss with your classmates if development assistance from world development agencies, such as World Bank or United Nations, would be preferable to private investment.
Introduction
The above statement is a situation of Foreign direct Investment ( the investment into business in a country by a company of foreign country either by a buying a company in the host country or expanding own business). As economic growth is the prime concern of every country, foreign investment has an important role to play in country’s economic development(Amacher, R., Pate, J., (2012)).
Benefits and costs to the Host Country
Globalization has made the countries realize the importance of foreign direct investment so when a multinational company invests in the host country ( be it developed or developing or underdeveloped ) there are many benefits along with some cost associated with it((Amacher, R., Pate, J., (2012)).
Let’s discuss the benefits first,
- huge amount of capital inflow gets generated in the country
- rise in employment of locals of host country.
- competition increases among the domestic companies and they try to be more efficient.
- access to different natural resources and technologies that they cannot produce themselves.
- investment in infrastructure to provide better transport facilities
- standard of living of the host country increases due to higher tax revenue from foreign multinationals.
There are some costs associated with Foreign direct investment to the host country (Chapter 17, section 17.5: Help From The Private Sector: Multinationals) are discussed below:
- the political situation of different countries keeps on changing and the foreign investor has to deal with the problems of paying higher taxes.
- some countries have a certain cap on the foreign direct investments(FDIs) that means there are some start up fees to the government like cost of forming legal entities or hiring cost, infrastructure set up cost etc.
- due to foreign investment the host country’s inflation rises.
- there is also sometimes exploitation of natural resources of the host country
- the domestic companies suffer a lot if they are unable to face the competitive environment.
Why invest in Developing Nation
A developing nation like India is suitable for foreign direct investment as these emerging economies have large number of educated and skilled manpower. India is now ranked fourth biggest economy in the world in terms of purchasing power parity and is the land of abundant natural resources. With stable political environment it’s easy to get business license for foreign investors. The country has stable tax rates, reduced import tariffs, various foreign banks and other financial institutions, a conducive environment for investment.
Foreign Aid Better than Foreign Direct Investment
Foreign Aid provided by World Bank or United Nation to the developing nations have solved the problems in society like food , clothing , clean water etc . This has contributed very small amount in the national budget of the developing nation. On the other hand foreign direct investment has contributed more to the economic development of the developing countries((Amacher, R., Pate, J., (2012)). So foreign aid reaching to the right people along with foreign investments together contribute to the total development of developing nations.
Citations
Amacher, R., Pate, J.,(2012) Principles of Macroeconomics. San Diego, California: Bridgepoint Education, Inc.
References
Amacher, R., Pate, J.,(2012) Principles of Macroeconomics. San Diego, California: Bridgepoint Education, Inc.
Chapter 17, section 17.5: Help From The Private Sector: Multinationals
www.nber.org/papers/w9293: Home and Host Country Effects of FDI
