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

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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.


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.


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.

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