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Explore the costs and benefits of FDI in low income countries

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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.

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