FDI

• Multinational companies (Transnationals)


  Business entity which has operations in multiple countries
• Multinational companies


  • Headquarters located in one country with business units or subsidiaries operating in several other countries
  • Some have annual revenue exceeding the GDP of many less developed countries
• Foreign direct investment (FDI)

  Investments undertaken by a company in the productive assets located in a foreign country, through either the outright purchase of a foreign company or the establishment of new operations of an existing business in a foreign country
• Host economy


  The economy in which the physical investment of foreign direct investment takes place
• Foreign financial portfolio investments

  Purchase of shares in a company by foreign entities, which confers part ownership but lacks the accompanying transfer of managerial control to the foreign investor
• The decision on the part of foreign-based firms to undertake investments in other countries is like any other investment decision by a profit-motivated firm, where the marginal return is compared to the cost of capital
• Differences in costs and market structures across countries are factored into the determination of marginal return, in order for the investor to determine how best to allocate investments to the most profitable country location
• The profit-maximizing motive of multinational investors results in allocative efficiency in the distribution of funds for investment purposes across nations
• FDI generates capital to meet deficiencies in savings in developing countries

  FDI introduces new resources to developing countries which typically lack savings for domestic capital formation, without having to channel resources away from other uses such as consumption
• FDI generates employment

  FDI increases the level of injections which results in an overall heightened level of economic activity and hence the generation of increased employment opportunities
• FDI generates foreign exchange


  FDI generates valuable foreign exchange for its host economy, which is vital for developmental programs requiring the importation of foreign capital, technology or raw materials
• FDI generates government taxation revenue


  The operations of multinational corporations generate significant economic activity which increases the tax base for taxation purposes, providing increased revenue to government coffers
• FDI increases productivity from the transfer of managerial skills and technology


  Developing countries receive spillover benefits from the transfer of sophisticated knowledge and expertise which stimulate greater productivity
• Foreign direct investment


  Investment made by a company or entity based in one country, into a company or entity based in another country
• Multinational companies

  Companies that operate in multiple countries
• Transfer pricing

  Pricing of goods and services between affiliated companies in order to reduce tax liabilities
• Arguments in favour of foreign direct investment


  • Fills managerial and technological deficiencies in developing countries
  • Provides spillover benefits from sophisticated knowledge and expertise
  • Enables transfer of skills and enhanced human capital
• Arguments against foreign direct investment

  • Repatriation of profits
  • Increased imports
  • Tax concessions and transfer pricing
  • Monopoly power and dominance of MNCs
  • Exacerbates inequality and dualistic income structures
  • Inappropriate technology
  • Political influences
• Repatriation of profits leads to a drain of valuable foreign exchange and represents a leakage of funds that could have been reinvested in the host economy
• Foreign direct investment may lead to higher imports of capital equipment, raw materials and intermediate products, reducing linkages with the domestic economy
• Multinational companies may negotiate significant economic concessions like tax concessions, tax holidays and tax rebates from host governments
• Multinational companies can use transfer pricing to shift reported profits away from high-tax economies towards low-tax countries, reducing their overall tax liability
• Multinational companies can use their superior resources to suppress local competitors and inhibit the emergence of small-scale local enterprises, leading to monopoly power
• Foreign direct investment can lead to dualistic income structures, with high-income expatriates and local elites coexisting with a large proportion of impoverished or low-income households
• Multinational companies may import inappropriate capital-intensive technology that is unsuitable for labour-abundant developing countries
• Multinational companies can exert considerable influence on political decisions in host countries, potentially subverting the political process