6. The theory of Foreign Direct Investment (FDI) through Multinational Corporati

Question

6. The theory of Foreign Direct Investment (FDI) through Multinational Corporations (MNCs) indicates that FDI/MNC has significant impacts on a host country through three major channels. a. List and explain each of these three channels. b. There are several studies that have attempted to empirically investigate how these theoretical channels may affect a host country. What are the conclusions of these studies? Were there mostly positive impacts or negative impacts on a host country? Explain for each.

Explanation / Answer

Ans 6a. In “host” countries i.e. countries which receive the FDI, they are impacted by the medium-term impact on the balance of payments, monopolization of the domestic market, and impact of FDI on the government's ability to manage the economy. How?

FDI’s effect on a country’s balance of payment accounts is an important policy issue for most host governments. There are three potential balance of payments consequences of FDI. First, when an MNC establishes a foreign subsidiary, the capital account of the host country benefits from the initial capital inflow. Secondly, if the FDI is a substitute for imports of goods or services, it can improve the current account of the host country’s balance of payment. A third potential benefit to the host country’s balance of payment arises when the MNC uses a foreign subsidiary to export goods and services to other countries. The evidence based on empirical research on the balance of payments effect of FDI, indicates that there is a difference between developed and developing countries, especially with respect to investment in the manufacturing industries.

When a MNC comes to a host country, it tries to capture the local market by introducing goods at a cheap or discounted rate. Further, the product may be better standardised than the host countries local made product. Thus it monopolises the domestic market with its product.

Amazing benefits of FDI for the host country can be significant, including technology spillovers, human capital formation support, enhancement of competitive business environment, contribution to international trade integration and improvement of enterprise development. Moreover, further than economic benefits FDI can help the improvement of environment and social condition in the host country by relocating ‘cleaner’ technology and guiding to more socially responsible corporate policies. All of these benefits contribute to higher economic growth, which is the main instrument for alleviating poverty in those economies.

Reference Material

https://www.wto.org/english/news_e/pres96_e/pr057_e.htm, http://www.ejist.ro/files/pdf/369.pdf

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