FDI and economic development

IB Econ Chapter 31

What is FDI?Foreign Direct Investment is

long term investment by private multi national corporations (MNCs) in countries overseas

This can be building new factories or buying existing companies

Why are MNCs attracted to foreign countriesRich in natural resources

such as oil and mineralsHuge and growing markets –

if they locate there they have better access to more customers and growing incomes lead to more demand

Costs of labour tend to be much lower in developing countries

Government regulations tend to be less – cost of doing business is less

Advantages associated with FDI Developing countries tend to have

large savings gaps which FDI can fill MNCs can provide employment and

improve the workforce with education and training

Give access to research and development

Multiplier effect of increased employment

Tax revenue from the corporate profits which can be used to help build better infrastructure

MNCs may prompt countries to build infrastructure so that they can operate there

May give consumers more choice and lower prices

A significant proportion of China’s exports are produced by foreign firms. Through joint ventures with foreign firms Chinese firms have grown rapidly

Disadvantages associated with FDI Often bring their own management and only

used low skilled workers limiting the host country’s ability to acquire new technologies

Some MNCs will be offered subsidies to locate in a developing country which reduces government revenue available for development

MNCs practice transfer pricing so that they make the least profit in the low tax areas meaning there is very little corporate tax advantage and profits are repatriated to home country

Negative externalities and exploitation of workers due to low levels of regulation

MNCs may strip country of resources and then leave

If they are there for the natural resources they may use capital intensive methods which create little employment

Complete Data response on P384