Question

Between 1985 and 1990, the global economy witnessed an unprecedented surge in flows of foreign direct investment (FDI). This sudden increase called back into prominence the range of questions that have long surrounded FDI. What causes firms to expand or contract their purchase of foreign assets? How do patterns of investment affect trade and development? What is the impact of FDI on host countries?

Answer 1

There are many reasons why many firms choose to setup their manufacturing base outside the country despite having a major country risk. Some of the major reasons are low manufacturing cost, skilled labor, and favorable tax environment. The companies are always in lookout for how to increase their profits for that they need to increase their sales and reduce the cost. Emerging markets have been a heaven for these companies as the cost of producing the same goods and services is significantly low and the government in order to encourage the economic development provides lot of favorable things to these MNCs. The patterns of investment and trade actually are in the favor of the host country as because of these MNCs there is a surge in export of goods and services, government revenue increases from taxation and a large number of people are provided with employment. The best example is China, in three decades the economy has grown approximately double-digit rate and its economy has seen tremendous growth and its influence in the world has increased. The host country normally benefits a lot from these FDI investment, increase in employment opportunities, increase in revenue, better standard of living for people, advancement in technology.