Foreign Direct Investment: Advantages and Disadvantages

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  • Created by: Hazza
  • Created on: 18-04-18 20:50

Foreign Direct Investment: Advantages and Disadvantages

Advantages

  • --------------------------Economic---------------------------
  • New factories creates jobs and create an inflow of capital
  • Cluster effect of interconnected businesses leads to multiplier effect
  • Technology transfer from TNCS
  • Increase in competition raises standard for domestic industry
  • Decreased cost of production, leads to increase in trade
  • Develops infrastructure for the country
  • Microfinance projects in local areas help local businesses develop and thrive
  • ----------------------------Social------------------------------
  • Transfer of knowledge and skills from the TNC's
  • Increased employment and wages increases quality of life
  • Microfinance projects help to empower women
  • As a result for an increase in employment for both men and women, the total fertility rate is reduced
  • Develops need for service industry such as construction and food
  • --------------------------Political------------------------------
  • Increase in the skill of the work force leads to empowerment
  • FDI helps to support the government of the developing country
  • Employs the workforce which therefore creates taxes for the government to use to develop
  • Gives the country a national status due to big brand TNC's coming to invest
  • Income from taxes trade
  • -----------------------Environment----------------------------
  • TNC's responsibility with the environment raises an example for other TNC's and helps to raise awareness for environmental problems
  • Influence the government to improve environmental problems

Disadvantages

  • ---------------------------Economic--------------------------
  • Profits are sent back to the home country of the company
  • The benefits of FDI are unequally distributed
  • Companies can just leave when prices for labour and wages increase, which can lead to country hopping
  • Drives out domestic industries
  • FDI may cause LEDC's to become dependent on TNC's
  • Leads to oligopoly, where the country's market is dominated by the TNC due to little competition from domestic industries
  • -----------------------------Social----------------------------
  • Erode or undermine local culture - Westernisation
  • Sweat shops have poor working conditions
  • Use of child labour in sweat shops
  • Migration to areas with FDI leads to overpopulation
  • Resources like water will end up being privatised by the TNC's
  • Focuses on economic rather an social development means that human rights may be sacrificed for economic progress
  • Honey potting land puts pressure on the local people, as well as the environment
  • Brain drain of local areas - local jobs and services will lose employees, due to the opportunists presented from FDI
  • ----------------------------Political---------------------------
  • TNC's can dominate the host government, which can lead to the exploitation of resources and labour
  • Decisions with the FDI may not be in the interest of the people in the development country
  • Strong political influence over the government leads to corruption
  • --------------------------Environment-------------------------
  • FDI can bypass environmental laws, leaving them with fewer controls and regulations, which can lead to environmental degradation
  • Deforestation reduces biodiversity and badly impacts the ecosystems
  • Resources are exploited by large TNC's

Evaluation

Foreign Direct Investment is helpful in improving the living standards of local communities in developing countries. This includes more opportunities, higher wages and the empowerment of females. However, this is at the cost of a countries sovereignty, as many local businesses will be eroded as they cannot compete with big TNC's like Nike. As well as this, a country's culture will be eroded away as a result of Westernisation, and the country's government will be heavily influenced by those TNC's. Despite this, people will generally improve in living standards, and FDI will introduce economic growth to the developing country, with the increase in jobs, trade and taxes.

Comments

mbarkeng

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Hello everyone In general, investing abroad is an excellent solution.
mbarkeng

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Hello everyone In general, investing abroad is an excellent solution. Personally, I invest in Dubai. It is worth noting the efforts of developers to provide flexible and long-term plans for payments for the purchase of such real estate, the banks of the Emirate, in turn, have created a well-developed system of mortgage registration and payment methods for transactions through it. For example, real estate can be purchased even in cases when both the seller and the buyer have issued a mortgage loan — the first one has not yet paid it for his property, and the buyer does not have the full amount to cover the price of the property. I am investing under control https://investorjunkie.com/.

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