Question

Discuss the benefits and costs of FDI from the perspective of a host country and from the perspective of the home country. Describe some of the home country policies that encourage outward FDI. What are the ways in which host governments restrict inward FDI?

Answer 1

1):-The main benefits of inward FDI for a host country arise from resource-transfer effects, employment effects, balance-of-payments effects, and effects on competition and economic growth.

. Three costs of FDI concern host countries

• They arise from possible adverse effects on competition within the host nation, adverse effects on the balance of payments, and the perceived loss of national sovereignty and autonomy.

•The benefits of FDI to the home (source) country arise from three sources. First, the home country's balance of payments benefits from the inward flow of foreign earnings

•Second, benefits to the home country from outward FDI arise from employment effects.

•Third, benefits arise when the home-country MNE learns valuable skills from its exposure to foreign markets that can subsequently be transferred back to the home country.

•The most important cost/concern of FDI for the home country centers on the balance-of-payments and employment effects of outward FDI.

2):-Some policies of hone country to encourage outward FDI

These countries have the larges economies after wwII
Historically these nations have engaged in international trade.

Encouraging outward FDI
1. government backed insurance protection
2. government backed loans to firms wishing to invest in developing countries
3. elimination of double taxation of forieng income
4. relax restrictions on inbound FDI

3):-the ways in which host governments restrict inward FDI.

Restricting: Ownership restraints, performance requirements (local content, exports, technology transfer, local participation)

ways in which host governments benefit inward FDI

1. Resource transfer effect: technology, management resources, capital is supplied to the host country
2. Employment effects: It brings jobs to the host country
3. Balance of payment effects: It improves the current account balance by reducing imports
4. Greenfield investments results in increased competition
by increasing consumer choice, driving cost down, increasing welfare of customers