• Benefits and cost of fdi the main benefits of inward fdi for a host country arise from resurce-transfer effects, employments effects, balance-of payments effects, andeffects on competition and economic growth.
Foreign management skills acquired through fdi may also produce important benefits for the host country. Foreign managers trained in the latest management techniques can often help the efficiency of operations in the in the host country, whether those operations are required or greenfield developments. Beneficial spin-offeffects may also arise when local personnel who are trained to occupy managerial, financial, and technical post in the subsidiary of a foreign MNE leave the firm and help establish indigenous firms.
Another beneficial employment effect for FDI is that it brings jobs to host country that would otherwise not be created there. The effects of FDI on employment are both direct andindirect. Direct effects arise when a foreign MNE employs a number of host-country citizens. Indirect effects arise when are jobs are created in local suppliers as a result of the investment and when jobs are created because of increased local spending by employees of the MNE. The indirect employment effects are often as large as, if not larger than, the direct effects.
FDI’s effect on a country’s balance-of-payments accounts is an important policy issue for most government. A country’s balance-of-payments accounts track both its payments to and its receipts from other countries. Governments normally are concerned when their country is running a deficit on the current account of their balance of payments. If the FDI is a substitute for imports of goods orservices, the effect can be to improve the current of the host country’s balance of payments. Much as of the FDI by the Japanese automobile companies in the U.S and Europe , for example, can be seen as substituting for imports from Japan. Thus, the current account of the U.S balance of payment has improved somewhat because many Japanese companies are now supplying the U.S market from theproduction facilities in the U.S, as opposed to facilities in Japan. Insofar as this has reduced the need to finance a current account deficit by asset sales to foreigners, the U.S has clearly benefited.
Effect on competition and economic growth
When FDI takes the form of greenfield investment, the result is to establish a new enterprise, increasing the number of players in a market and thus consumerschoice. In turn, this can increase the level of competition in a national market, thereby driving down prices and increasing consumers’ economic welfare. Increased competition tends to stimulate capital investment by firms in plant, equipment , and R&D as they struggle to gain as edge over their rivals. FDI’s impact on competition in domestic markets may be particularly important intelecommunications, retailing, and many financial services, where exporting is often not an option because the services has to be produced where it is delivered.
Adverse effects on competitions
Host governments sometimes worry that the subsidiaries of foreign MNE’s may have greater economic power than indigenous competitors. If it is parth of the larger international organization, theforeign MNE may be able to draw on funds generated elsewhere to subsidize its costs in the host market, which could drive indigenous companies out of business and allow the firm to monopolized the market. General, while FDI in the form of greenfield investments should increase competition, it is less clear that this is the case when the FDI takes the form of the acquisition does not result in a...