Foreign direct investment and economic development (4.5)

Revision cards for section 4.5 (chapter 31) in the International Baccalaureate economics course

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Foreign Direct Investment (FDI)

Foreign Direct Investment (FDI) - direct, long-term, investment by a country in production in another country, usually given by Multi National Corporations (MNCs)

There is a number of reasons to why an MNC would give improve development in a country, some of these reasons are:

The country might be rich in natural resources (oil and minerals). MNCs have the technology and expertise to extract these resources

Some developing countries are representing huge and growing markets, FDIs can give the MNCs acess to these markets and potential costumers

The cost of labour is lower in developing countries

In many developing countries, governmental regulations are less severe. This makes it easier for MNCs to produce and further reduce the cost of production

Some developing countries offers tax concessions to attract FDI

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Possible advantages associated with FDI

The book discusses some advantages to FDI:

Increased savings are a necessary condition for growth. Developing countries tends to suffer a savings gap which FDI can help then fill

MNCs will provide employment in the country - and in many cases also education

MNCs provides developing countries to greater acess to technology

Increased employment and earning which may lead to a multiplier effect on the hosy economy

Increased tax revenue from MNCs

MNCs may buy existing companies, hence injecting foreign capital

MNCs may in some cases improve infrastructure

MNCs can provide consumers with lower prices and give them more choices

MNC activity, along with liberalized trade, can lead to a more efficient allocation of world resources

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Possible disadvantages associated with FDI

The book also discusses disadvantages to FDI:

MNCs can, despite providing employment, bring in their own management teams and simply use cheap low skilled workers for production

In some cases MNCs have too much power, because of their size, and receive large tax advantages

Transfer pricing, where MNCs sells their own goods and services from one division of the company to another, in order to take advantage of low tax rates

MNCs may situate themselves in a country where the legislations concerning pollution isn't very strict

MNCs may enter a country to extract a certain resource and leave

In most cases of MNCs buying domestic firms, the owner of the firm is paid with shares in the MNC

The MNC may transfer their porfits out of the country

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