Question

Describe both the costs and benefits of Foreign Direct Investment (FDI) to the home and host countries. (400 words – Maximum in your own words)

Please no Plagiarism

Answer 1

The trade has brought the world closer and boundaries of the countries are becoming thinner. The factor of production such as capital and labor is moving around the world to produce optimal results and this is nothing but the globalization. The MNCs tend to have headquarter in home country but manufacturing facilities spread across the world.

An MNC will shift its manufacturing facility to another country such as in Asia if it is offering low cost labor. The MNC in this case will have to invest capital in that country for establishing factory and other related facilities. Such an investment is called as FDI or Foreign Direct Investment. The foreign firms can directly invest into financial assets also but it is called as FPI or Foreign Portfolio Investment.

The country which is making FDI can benefit from the advantage the host country offers such as low-cost labor like in China or skilled software professionals such as in India. The other factor is availability of raw material such as minerals which could be extracted by establishing the facility there.
The home country also carries the political risk as the government can appropriate the assets of the foreign company if it changes the policy. The case of United Fruit Company in Guatemala is evident here and CIA had intervened by toppling the Guatemala government. Further, the home country might lose jobs because of shifts of manufacturing abroad.

The country which receives the FDI could benefit from increased flow of the funds and it can also have job creation in the economy. The expertise in management, technology brought by the company helps the overall economy.
However, the higher level of funds flowing in the economy can push the inflation as well as induces the exchange rate fluctuation. The manufacturing facilities could damage the local environment and local economic ecosystem.