Question

What are potential effects of inward foreign direct investment on developing countries. In addition, list the possible benefits, and negative effects FDI can bring. Some of these effects may be political, others economic, social, or environmental. Briefly explain each potential benefit and each potential cost.

Answer 1

Solution:-

1 . Positive Efeects Are:-

1- transfer of technology that cant be achieved through financial investment.

2- promote competition in domestic input market.

3- development of human capital through employee training process in course of operating new business.

4- tax revenues increase as a share of revenue earned by these firms are aid as corporate tax.

2. Negative Effects Are

1- negative wage spillover, as the big firms who enter the coungtry higher talent at high wage and leave the unskilled lot for other less high profile firms.

2-profit repatriation, payemnts are made to parent company in terms of royalties etc leads to huge capital outflow from the host country worsening the balance of payment.

3- infrastructure developmemnt constraint, fdi constraints infra development by diverting resources from public investment in infastructure.

4. environmental issues, a large volume of fdi is concentrated in natural resource sector of developing countries making short term profits for the country on the cost of long term gains.