04/02/16
Lesson 1: FDI & Econ Development
FDI: Long-term investment by private multinational corporations (MNCs) in countries overseas.
- MNCs build new plants or expand existing facilities in foreign countries, greenfield investment, or MNCs merge with or acquire existing firms in foreign countries.
FDI has fluctuated globally and later we'll analyze a particular country which has experienced a significant increase or decrease.
MNC's are attracted to developing countries for a number of reasons:
- Countries with natural resources and MNCs have the technology/expertise to extract such resources.
- Developing economies/growing markets; Brazil, China, India. Represent economic opportunities to capitalize on growing incomes and demand for consumer goods.
- Cheap labor; lower cost of production enables MNCs to sell final product at lower prices, thus making higher profit.
- Less regulations makes it easier for MNCs to set up, reducing costs of production; lowered corporate tax rate
Advantages FDI:
- Increase saving potential of the country; may lead to economic growth.
- Employment opportunities; education and training.
- Developing countries have greater access to R&D, technology, marketing expertise to enhance industrialization.
- Host country gains tax revenue from MNCs profits; increase investment in infrastructure, health care, education = development.
- MNCs buy existing companies, injecting foreign capital and increasing AD.
- MNCs may improve infrastructure of economy; physical/financial.
- MNCs provide more choice and lower prices for consumers.
- Encourage liberalized trade leading to more efficient allocation of world resources.
Disadvantages FDI: Main concern is with sustainable economic development.
- Employment is only low skilled labor. MNCs use their own management teams and don't actually provide education/training.
- MNCs have too much influence; reducing government revenue and impact on policy.
- Transfer pricing, MNCs sell goods/services from one division to another across boarders. This is done to take advantage of different tax rates on corporate profits. One-third of all international trade are sales from one branch of a firm to another. Governments lose out on this potential revenue.
- MNCs buy domestic firms, owners are paid in shares of MNC. Actual money is often not used in domestic country.
- Repatriate their profits, transfer profits out of the country.
MNCs are likely to develop and publicize a set of policies to show that they are acting responsibly: Corporate Social Responsibility (CSR)
- Human, employee rights, environmental protection, sustainable/community development.
Activity: Identify and explain why a country has increased or decreased FDI significantly between the years 2011-2014. http://data.worldbank.org/indicator/BX.KLT.DINV.CD.WD