Question

a. What are the external & internal reasons that creates grounds for FDI?                                            4
Support your answer with example.

Answer 1

FDI is the net transfer of funds to purchase and acquire physical capital, such as factories and machines, e.g. Nissan, a Japanese firm, building a car factory in the UK.

External and Internal Reasons that create ground to FDI:

1. Take advantage of lower labour costs in other countries (e.g. India is one of biggest recipients of FDI, where labour costs are much lower than in the OECD.
2. Take advantage of proximity to raw materials rather than transport them around the world.
3. Avoid tariff barriers and other non-tariff barriers to trade.
4. Reduce transport costs. For example, by producing cars in the UK, Nissan has lower transport costs for selling to the UK market.
5. Opportunities for using local knowledge to help tap into domestic markets. For example, by investing in a foreign country and working with local workers, a multinational can gain a better insight into what works well for local markets.
6. A weak exchange rate in the host country can attract more FDI because it will be cheaper for the multinational to purchase assets. However, exchange rate volatility could discourage investment.
7. Investment from abroad could lead to higher wages and improved working conditions, especially if the MNCs are conscious of their public image of working conditions in developing economies. So the recieving country supports the foreign direct investment.