• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Examine the positive and negative implications of Foreign Direct Investment (FDI) on the host countries as well as the investing companies.

Extracts from this document...

Introduction

This investigation will examine the positive and negative implications of Foreign Direct Investment (FDI) on the host countries as well as the investing companies. This study will also touch upon the differences FDI makes for developed countries as well as low economically developed countries (LEDC's). Introduction Foreign Direct Investment is defined as 'any equity holding across national boarders that provides the owner substantial control over the entity' (see Appendix A). This is generally defined as a 10% holding or greater. Most FDI ends up being 100% ownership by a Multi-National Corporation (MNC). FDI has increased dramatically in the past twenty years (see Appendix B need 2 find!), to become the most common type of capital flowing across borders in both developed and developing economies. For the most part politicians and economists welcome the increase of FDI to developing economies. It brings capital needed for economic development in the country in a way that is not as risky as borrowing from overseas. It may also bring a range of additional benefits. However there is conflicting evidence about the real world effects of FDI, which will be analysed during the course of this essay. Firstly, this investigation will look at the positive and negative implications on the host country. The positive consequences of FDI on the host nation To examine the consequences of FDI on the host country, this report will single out the benefits of FDI to a 'developing country'. ...read more.

Middle

Those taxes can then be spent on needed infrastructure, social programs, education etc. This helps explain why governments encourage FDI, however, this is not always the case, the MNC can come up with ways in which it exploits the country that hosts it, however this subject will be explored later on in this essay. FDI can sometimes lead to what has become to be known as a 'positive spill over', this happens as MNC's typically have greater technological and management expertise than local firms. This expertise can be transferred to other parts of the economy. This obviously happens the most concentrated when the MNC has close ties to local partners, suppliers and customers. Another reason FDI is encouraged is because MNC's are thought to provide training and better employment opportunities for development of the labour force. It can also be the case that MNCs pay better and train employees more thoroughly than domestic firms in developing economies. It is also claimed that the presence of MNCs in the labour market will provide local firms with an incentive to improve conditions and wages of workers. Therefore, the general workforce of the host country benefit. MNCs by definition require substantial skill in importing and exporting. This is obviously because they operate in more than one countries, and require already established distribution links around the world. These export orientated foreign firms in a country can help improve local firms efforts in trying to sell overseas. ...read more.

Conclusion

Therefore, it can be considered a negative for a country to become dependant on FDI. FDI may create damaging competition for local firms; this is often referred to as a 'negative spill over'. This is because MNCs often have skill, technology and capital that local firms cannot match. Local firms can be put out of business and from this unemployment would result. (find example where local firms forced out?) however, this could lead to a paradox where in order to survive local firms are forced to modernise and improve efficiency. The question to ask here may be whether local firms will be able to improve enough to compete. If the MNC gains a monopoly position by forcing out all local firms within its industry, it could then raise prices forcing citizens of the host country to pay higher prices as there are no viable substitutes. This is a huge benefit for the MNC which will be able to make supernormal profits in the host country, and then siphon those profits back to its home country. Social protest and disorder can occur when MNCs are seen as exerting too much power, especially monopoly power over another countries 'strategic industries' (or 'infant industries') such as electricity, water, and communications. For example, in Bolivia 2000 a local water service was taken over by a multinational conglomerate led by 'Bechtel'. When this company instantly doubled prices overnight. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our AS and A Level UK, European & Global Economics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related AS and A Level UK, European & Global Economics essays

  1. The positive and negative effects of Globalization

    The research into issues of global development by the Brandt Commission in 1980 and 1983 emphasizes the importance of understanding complex inter-relations in terms of production and consumption, health and welfare and the environment. A greater understanding of these issues is essential to prevent further division between the North and South.

  2. Multinational corporation (MNC)

    Thus MNCs receive an enormous degree of structural power in the world through control of finance. Issues: According to a Background Paper for the UN Financing for Development Process (2000), governments are gradually becoming less capable to control multinational corporations.

  1. This investigation will try to test the level of external debt and measure its ...

    characteristics of external debt, the investigation will try to determine if the country has used external debt in a manner that has jeopardized economic development. RESEARCH RESULTS AND ANALYSIS THEORETICAL FRAMEWORK Economic Origin of External Debt Necessities: The external debt is not a new generated problem, it's just that in

  2. The Nature of Demand for Shipping

    Source: "ISL Shipping Statistics and Market Review 2000" As in table 02 we can see that there is a signinificant ups and down in shipping demand and this demand is depends on Several factors, which are explained below 6 A.Price:

  1. Why has GDP growth been so slow in Somalia?

    Such a situation creates strong incentives for de?cit spending. As the state is weakened by an internal threat, it often turns on the civilian population, using tools of intimidation to maintain its power. In addition, as the con?ict expands, the state ?nds itself resource constrained and increases its tax rates.

  2. A view from the bridge - Examine the manliness hostility and aggression and the ...

    and... kisses her on the mouth", gives the feeling to the audience that Eddie might have some feelings for Catherine. This is because family members don't usually kiss each other on the mouth, especially uncles and nieces, so what Eddie has just done seems to the audience to be uncomfortably intimate, and is touching on the view of incest.

  1. Many examples of Companies working globally are: Nike, Adidas and other companies which may ...

    You may think at this point why this happens? Well to put it in perspective there are two main reasons. One reason is that have been leaps and bounds in he evolving of our technology understanding. The development of technology has enabled us to allow people, goods, money and even

  2. Where does the World Trade Organisation fit in the overall scheme of international public ...

    The price of EU approval of the text was the prefatory insertion of "without prejudging the outcome of the negotiations". This arguably dilutes the commitment to abolish export subsidies, but was necessary in order to avert outright failure in Doha.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work