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The Impact of Inward FDI on Host Countries - Essay Example

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Introduction Foreign Domestic Investment (FDI) inflow has many effects on the host countries. Firms that are investing in other countries have superiority in technology, services and the quality of goods that they produce. These firms add capital stock to the host countries, which leads to an increase in the output levels of these countries…
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The Impact of Inward FDI on Host Countries
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Download file to see previous pages Discussion The impacts of inward FDI on host countries Transfer of resources Inward FDI has various effects on host countries. Grimwade (2000) indicates that inward FDI has the effect of transferring resources whereby resources such as technology, capital and management are transferred during investment. Capital transfer increases the capital stock in a host country while the transfer of management leads to the improvement of management skills in this country. Moreover, during transfer of resources, host countries may benefit from new technologies from the foreign investors. Overall, the transfer of the aforementioned elements leads to an increment in the host country’s productive potential as it leads to the increase of the Gross Domestic Product (GDP). Host countries have witnessed substantial economic growth due to FDI. This growth, alongside other benefits, has heavily depended on various factors. The multinational corporations in host countries have raised funds in these countries through bank loans, issuing shares or issuing bonds to the investors in these countries. However, such a move has not yielded the result of transfer of capital and it has instead pushed the costs of raising capital for the firms in the host countries. ...
(2004) indicate that some MNCs from industrialized countries have introduced capital-intensive methods in countries that require labor-intensive methods owing to abundance in labor there. Furthermore, management skills and technologies brought to the host countries may have a little benefit to their economy in case they are not passed on to the employees in the local firms. Balance of payments and trade Buckley and Casson (2002) reveal that through inward FDI, host nations have been able to enjoy positive effects on their balance of payments in the short run. The inflow of foreign capital has benefited the capital account of balance of payments, with the current account improving due to a decrease in imports or an increase in exports. Foreign companies also face the need to import various parts and components from their parent companies during their early stages. Moreover, there is a possibility of large inflows emanating from the foreign countries pushing the exchange rates, which renders the exports less lucrative and increases competition. Appreciation in the exchange rates may have the effect of attracting speculative capital inflows, which may push the rate further and lead to its overshooting. In case the central bank wants to prevent the rise of the rate through selling currency to foreign money holders, there will be an increase in the supply of money, which culminates into inflation. In the end, there will be an outflow of FDI when the parent companies are paid dividends and interest payments (Jones, 2005 ). Employment Dicken (2007) highlights that inward FDI has the effect of increasing employment in the host countries. This is a direct effect of FDI as the foreign firms in these countries are able to employ workers who might not have attained any form of ...Download file to see next pagesRead More
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