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

Explore the costs and benefits of FDI in low income countries

Extracts from this document...

Introduction

Explore the costs and benefits of FDI in low income countries In this paper we are going to look at the costs and benefits of Foreign Direct Investment (FDI) in low-income countries. Since the 1980s there has been a dramatic increase of FDI into low-income countries. This has been as a result of greater interest in FDI as the world gradually integrates further, a process that we will refer to as globalisation. Let us quickly define what FDI is, FDI occurs when an investor based in one country (the home country) acquires an asset in another country (the host country) with the intent to manage that asset.1 The differentiation between FDI and a portfolio investment approach is slight but with portfolio management the parent firm would not take an interest in the running of the affiliate firm. We usually refer to the firms as either the "parent firm" (the investor) and the "affiliate" or the "subsidiary" (the asset). There are three ways in which FDI can be made: * Equity capital more than 10% of the ordinary shares or voting power in the enterprise is normally considered a FDI. ...read more.

Middle

contracting and quality assurance in dealing with suppliers, export/import firms and foreign licensees. We have seen why firms engage in the practice of FDI but we are going to turn our attention to what effect FDI has on trade for both the home & host country. We look at the effect on trade because it has a benefit for the host country in particular. As the host country is now a producing nation, it leads to an increase in their exports. At the same time the critics argue that the home nation suffers as a result of this and loses out on exports which in turn affects the country's employment and balance of payments. This view came about from studies by Mundell in an article he wrote in 1957 in the American Economic Review. Even when FDI is in place, the host country does not reduce its imports, which disproves the theory of Mundell, that the home country loses exports. The host country now has more money available as it is exporting so it can improve things in the country. 4 Looking at this we see that as a result of FDI, trade increases which improves the economy. ...read more.

Conclusion

There is also the worry that the MNE will be pressured by the home country, which in turn could cause problems in the host country, but usually these are unfounded criticisms. In conclusion FDI is a very important to world development and further growth. It is probably the most important way that technology is transferred to LDCs, it also leads to a higher productivity amongst the workforce in the locally owned firms (witnessed usually in the manufacturing industry). It is true that there are some concerns about FDI but in this global economy LDCs needs FDI just as much as the MNE needs to invest in LDCs. Any potential concerns can be put aside as the benefits are much greater than the costs, as we have seen. Endnotes: 1 P KRUGMAN & M OBSTFELD, "International Economics Theory & Policy" v5 Addison-Wesley Publishing 2 Statement by Horst Kohler, Annual Meetings Prague, IMF 2000 3 WTO "Trade & Foreign Direct Investment" October 1996 4 R MUNDELL, "International Trade and Factor Mobility", American Economic Review 67, 1957 pp 321-35 5 E MANSFIELD et al, "Technology Transfer, Productivity, and Economic Policy", 1982 New York: W.W. Norton ?? ?? ?? ?? BE 3160 Multinational Enterprise - 1 - ...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. Where does the World Trade Organisation fit in the overall scheme of international public ...

    The EU, however, shows no signs of significant movement. The prospects for a political breakthrough in the agricultural negotiations, upon which the future of the whole round hinges, appear depressingly remote at the moment. Services The General Agreement on Trade in Services (GATS)

  2. Outline the debate about whether 'export-led growth' is better or worse than 'import substituting ...

    This was undoubtedly supported by Brazil's huge domestic market; many authors state that countries with much smaller populations did not benefit from this but evidence from Table 2 suggests that a number of smaller Central American economies fared better through this period than countries such as Argentina and Chile with larger populations18.

  1. Evaluate the view that 'unfair terms of trade' are the primary cause of poverty ...

    These companies look for the cheapest offers, so as to maximise profit, and will locate their production facilities world wide to achieve this.

  2. Explain the evolution and characteristics of the debt problems of LDCs. In the light ...

    In Latin America, debt-GNP ratios fell from 62% in 1985 to 37% in 1984, a small success for structural adjustment, albeit paid for by losses in human indicators and economic growth. On the other hand, debt-GNP ratio had risen in Sub-Saharan Africa from 76% to 136% in the same period16.

  1. Distribution of Income and Wealth HSC Notes

    * The table above shows that the 35-44 age bracket earns the highest mean income per week at $1124. Meanwhile the 15-19 earn the lowest at $278/week followed by those ages 10-14 at $657/week. * The table suggests that income levels are low in the earlier years of working life, since people have less experience and education.

  2. The Balance of Payments.

    Although the UK's overall trade deficit has deteriorated over the past few years, exemplified by record deficit with the EU, further widening of the trade gap has to some extent been offset by improved trade with the rest of the world, particularly the USA.

  1. International Trade - I have been asked to investigate the possibility of a company ...

    The USSR was the leading trading partner in that year. Reliable estimates for more recent years are scarce, in view of the continuing civil trouble. Principal exports were natural gas (42 per cent), dried fruits and nuts (26 per cent), cotton, rugs, and karakul skins.

  2. The Benefits of Trade

    (Bishop 2000) 3 (a) The Invisible Hand The 'invisible hand' generally refers to 'the purchase or sales of goods and services for money.' (Friedman p25) Claim made in the literature 'The invisible hand of competition automatically transforms self interest into common good.'

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