Question

In not more than 350 words Outline the advantages and disadvantages of the US economic factor interms of foreign direct investment.

Answer 1

Foreign direct investment happens when an individual or business owns 10% or more of a foreign company.If an investor owns less than 10%, the International Monetary Fund (IMF) defines it as part of their stock portfolio.A 10% ownership doesn't give the individual investor a controlling interest in the foreign company. However, it does allow influence over the company's management, operations, and policies. For this reason, governments track investments in their country's businesses.In 2018, global foreign direct investment was $1.29 trillion, according to the United Nations Conference on Trade and Development. That 2018 FDI figure was down 13% from 2017's $1.49 trillion. The record investment was $2.03 trillion in 2015.The decline in FDI was due to President Donald Trump's tax cut. Since 2017, U.S multinational corporations have repatriated accumulated foreign earnings. Many of those investments were in Europe.The Act allows companies to repatriate the $2.6 trillion they held in foreign cash stockpiles. They pay a one-time tax rate of 15.5% on cash and 8% on equipment.The Congressional Research Service found that a similar 2004 tax holiday didn't do much to boost the economy. Instead, companies distributed repatriated cash to shareholders, not employees

advantages

Foreign direct investment benefits the global economy, as well as investors and recipients. Capital goes to the businesses with the best growth prospects, anywhere in the world. Investors seek the best return with the least risk. This profit motive is color-blind and doesn't care about religion or politics.

That gives well-run businesses, regardless of race, color, or creed, a competitive advantage. It reduces the effects of politics, cronyism, and bribery. As a result, the smartest money rewards the best businesses all over the world. Their goods and services go to market faster than without unrestricted FDI.

Individual investors have the potential to achieve greater portfolio efficiency (return per unit of risk), as FDI diversifies their holdings outside of a specific country, industry, or political system. Generally, a broader base of investments will dampen overall portfolio volatility and provide for stronger long-term returns

Recipient businesses receive "best practices" management, accounting, or legal guidance from their investors. They can incorporate the latest technology, operational practices, and financing tools. By adopting these practices, they enhance their employees' lifestyles. That raises the standard of living for more people in the recipient country. FDI rewards the best companies in any country. It reduces the influence of local governments over them.

Recipient countries see their standard of living rise. As the recipient company benefits from the investment, it can pay higher taxes. Unfortunately, some nations offset this benefit by offering tax incentives to attract FDI.

Another advantage of FDI is that it offsets the volatility created by "hot money." That's when short-term lenders and currency traders create an asset bubble. They invest lots of money all at once, then sell their investments just as fast.

That can create a boom-bust cycle that ruins economies and ends political regimes. Foreign direct investment takes longer to set up and has a more permanent footprint in a country

disadvantage

Countries should not allow foreign ownership of companies in strategically important industries. That could lower the comparative advantage of the nation, according to an IMF report.

Second, foreign investors might strip the business of its value without adding any. They could sell unprofitable portions of the company to local, less sophisticated investors. They can use the company's collateral to get low-cost, local loans. Instead of reinvesting it, they lend the funds back to the parent company.