- Inward FDI occurs when investment by foreign firms results in more than a 10% share of ownership of domestic firms
- Foreign FDI has the potential to generate significant economic growth as more economic activity, employment and output is generated
- Foreign FDI has the potential to raise household income which helps to break the poverty cycle
- The impact of FDI on economic growth depends on how the FDI occurs
- E.g. Chinese firms frequently invest overseas, but bring their own employees with them - and send all of their profits home - the economy and individuals within the economy benefit less than they could have
- E.g. Indian firms frequently invest overseas and tend to hire local employees and reinvest more of the profits than Chinese firms generally do
Advantages and Disadvantages of FDI to Generate Economic Growth and Development
Advantages of FDI
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Disadvantages of FDI
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- FDI can be a major source of finance in less economically developed countries
- FDI helps to generate extra national income which can increase the level of savings - and higher savings can help to increase funds available for domestic investment
- Expansion of supply can lead to increased employment opportunities
- The government may receive higher tax revenue generated by the increased profits from the additional level of national output
- As more foreign firms invest, governments often start to develop new infrastructure to support their business activity
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- Weak local regulations are often exploited leading to poor working conditions and increased negative externality's of production
- Profits tend to be moved off-shore or returned to the home country of the multinational firms which means that less is reinvested back into the development of the host nation
- Multinational firms often pay very little tax to host nations as they use sophisticated corporate practices to reduce the amount of tax they are liable for (e.g.transfer pricing )
- Local firms may struggle to compete with multinational firms who are now based in their country - and they go out of business
- Multinationals are likely to have the power to keep wages low
- Multinationals may use workers from their country for management roles and only employ local unskilled labour for manual tasks. The workers may not develop many new skills from the role
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