The theory of Foreign Direct Investment (FDI) through Multinational Corporations

Question

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

a. List and explain each of these three channels.

There are three main categories of FDI:

• Equity capital -: The MNC invest in a foreign company through equity route , wherein they take stake in a company with voting rights . The amount of investment differs as per host country rules and regulations in FDI investment. The investment mode can be merger and acquisition and greenfeild project route

• Reinvested earnings -: The profit earned by MNC in host country is not completely distributed as dividends or royalty but a percentage is kept as retained earnings. This retained earnings is assumed to be reinvested in the host country

• Other capital refers to short or long-term borrowing and lending of funds between the MNC and the affiliate.

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

The impact of FDI through MNC in host countries

The MNC through FDI provides direct and indirect transfer of technology between countries. This as per researchers provides a efficiency-enhancing characteristics of their foreign investment.

The FDI is also associated with secondary benefits through the diffusion of technology to firms in the host country. This diffusion may be deliberate, such as when technology is licensed by the affiliate to a domestic firm, or it can be in the form of a technological spillover which occurs when the activities of the multinational firm yield benefits for local economic agents beyond those intended by the multinational.

The FDI as made local rivals in host country to upgrade their own technological capabilities as a consequence of competitive pressure from the local affiliate of the MNC .The technology and productivity of local firms may improve as foreign firms enter the market and demonstrate new technologies, and new modes of organization and distribution, provide technical assistance to their local suppliers and customers, and train workers and managers who may later be employed by local firms. Foreign subsidiaries may themselves conduct research and development activities aimed at adapting the parent firm's innovation to local conditions.

Studies of manufacturing in several host countries provide evidence that FDI exerts a positive effect on local investment in fixed capital and education, and less restrictive conditions imposed on affiliates appear to increase the extent of technology transfers.

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