Question

It is unclear whether the free flow of capital is beneficial to all countries. Explain the benefits and costs of allowing capital to move freely.

Answer 1

Capital inflows from Multi-National Companies (MNCs) apply to direct investment by MNCs in European economies. Capital flows can also include the acquisition of properties, such as stocks, properties and government bonds.
The purpose of these capital inflows is to increase the degree of investment. MNCs are pouring money into the economy. It provides many benefits to the economy.
Increased aggregate demand- As part of AD, higher investment would support AD, leading to better economic growth. This would lead to a lower degree of unemployment.

Increased production efficiency. Inward investment will not only increase AD, but will also increase aggregate supply. Investment in new factories is rising output efficiency, and AS is projected to move to the right. This makes it possible to boost economic growth without inflation.
Tecnological changes. MNCs are not only permitted to invest in new resources. They will also implement new working methods that will help to improve labor efficiency. For example, as Japanese companies invested in the United Kingdom, it was said that they helped to strengthen workplace relations and to get more out of the workforce. Japanese companies have adopted new strategies such as 'Time Management Only' and a less confrontational approach toward staff and managers

Investment by international companies provides an incentive for goods to be manufactured more efficiently which may lead to lower prices for domestic firms.

Disadvantages are:

Domestic firms could lose out to new multinational corporations. For example , local coffee shops can lose out to larger chains, such as Starbucks. They will increase the homogenization of goods

Avoiding tax. The issue is that big multinationals like Facebook, Apple and Google have moved to countries with the lowest corporate tax rate. Amazon – Luxumberg, Google in Ireland, for example. The ability of multinational corporations to select the lowest corporate tax rate ensures that it promotes tax rivalry – with countries thinking like they need to will corporate tax in order to stay competitive. As a result , global corporate tax rates have dropped in recent decades, placing a greater burden on customers and staff.

Capital inflows can also involve the acquisition of property and properties. International companies and individuals have played a major role in purchasing UK properties and investing in new developments in real estate but, in an overheated housing market, it has had the effect of driving property prices past long-term price to income levels , making them less affordable for ordinary employees. Some have called for restrictions on foreign ownership

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