Question

In a host country, FDI is expected to have a positive or a negative impact depending on the issue considered. Based on your readings and class discussion, indicate how FDI inflow is expected to affect each of the following in a host country (4 points each).

1. Corruption
2. Productivity
3. Tax revenue
4. Economic growth
5. Spillover benefits

Answer 1

So you already know what FDI is, but there is a difference between FDI inflow and FDI outflow. FDI inflow is the value of direct investment made by non-residents into the economy. Let's take a look at all the options-

Corruption- Corruption can have both bad and good effects. If corruption makes it easier for people to invest then, the FDI inflows would be more. This can change based on what the corruption is aimed at. Not going into the moral aspects of corruption, it could either be detrimental or useful for FDI.

Productivity- If overall productivity increases then there will be an overall increase in the state of the economy. This will also increase the welfare as well as the standard of living. This would inturn ncrease the number of investments as investors would be very interested in investing in a booming economy. A decrease in productivity will have the opposite reaction.

Tax revenue- MNC's will always look to invest in countries with lower tax rates, this would be the right move for them. Thus a high tax rate would mean lower investments and vice versa.

Economic growth- As I said above if there is economic growth within the country, investors would be more willing to invest as they would be able to make more profits later on.

Spillover benefits- Spillover benefits means that a third party is also profited from an economic activity. As long as the benefits do not have a detrimental effect on profits, FDI inflows will not change how much ever the spillover benefit.

Hope this helps!