Question

Background:

Increased Foreign Direct Investment (FDI) is one result of Globalization, where companies take advantage of reduced barriers, opening of markets and increased focus on market driven economy and unrestricted trade. Governments have also increasingly offered foreign companies’ various incentives if they would set up a company in their country.

FDI has many advantages and disadvantages for both home and host countries. For many countries, FDI is a lifeline, an opportunity which they can‘t afford to miss. But for others it is more of a threat to the national sovereignty of the country in question.

Whatever the reason, it is obvious that FDI is a big part of international trade and the development of countries, industries, societies and Globalization in general,.

Questions / tasks:

1. Name three of the main benefits of FDI to both governments (home and host)
2. How will reduced focus on Globalization affect the future development of FDI?
3. What explains the strong position of developing countries when it comes to FDI?

Answer 1

1.

For home country, the first benefit of FDI is the increased access to the market of the host country. The second benefit is the building a strategic front in different international matters. The third benefit is the preferential treatment and incentives to be given by the host government to the home country and its companies.

For the host country, the first benefit of FDI is the presence of private funds that is used to many infrastructure based projects. The second benefit is the expansion of the economy and creation of new jobs for the local people. The third benefit is the support for the local economies where the FDI initiatives work and create derived demand for the local products.

2.

A reduced focus on globalization, will negatively affect the FDI and institutions as well as MNCs become selective in nature before making any FDI into the country. So, creation of FDI will decrease and countries will compete with each other in terms of the better investment opportunities, incentives and opening up of the market, to get the bigger share of the FDI.

3.

Developing countries have a vast market that is not yet explored. Further, these countries have governments that want some FDI to come and act as a private support the develop the economy and for that, they give incentives of different types such as tax holidays, free land and other resources on subsidized rates. It makes these developing countries to be in a strong position when it comes to the FDI.