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The constant flow of FDI into a country translates into a continuous flow of foreign exchange. This in turn ensures stable exchange rates. This is another very important advantage of FDI. FDI is a source of external capital and higher revenues for a country.
When factories are constructed, at least some local labour, materials and equipment are utilised. Once the construction is complete, the factory will employ some local employees and further use local materials and services. The people who are employed by such factories thus have more money to spend. This creates more jobs. These factories will also create additional tax revenue for the Government, that can be infused into creating and improving physical and financial infrastructure.
Inflow of capital is particularly beneficial for countries with limited domestic resources, as well as for nations with restricted opportunities to raise funds in global capital markets. By facilitating the entry of foreign organisations into the domestic marketplace, FDI helps create a competitive environment, as well as break domestic monopolies. A healthy competitive environment pushes firms to continuously enhance their processes and product offerings, thereby fostering innovation.
Consumers also gain access to a wider range of competitively priced products. For a multinational corporation, FDI in India is a means to access new consumption and production markets, and thereby expand its influence and business operations. It can gain access not only to limited resources such as fossil fuels and precious metals, but also skilled and unskilled labour, management expertise and technologies.
FDI also enables an organisation to lower its cost of production- by accessing cheaper resources, or going directly to the source of raw materials rather than buying them from third parties. Often, there are various tax advantages that accrue to a company undertaking FDI. This can occur when the home country allows tax deduction on foreign income, or when the recipient country allows tax deductions and benefits for organisations incurring FDI in that country.
Additionally, this can happen when the recipient country has a more beneficial tax code than the home country. Exclusive Investment Forum. Popular: fdi policy , taxation in india , major investors. Team India Blogs. Company Name. India Presentation Updates. Invest India Newsletter. Sectors of Interest. Auto Components. Capital Goods. Defence Manufacturing. Electronic Systems. Food Processing. Medical Devices. Renewable Energy. Thermal Power. June 12, FDI. Sanchi Padia. Improvements in Infrastructure In some cases, MNCs may improve the infrastructure of the country, both physical and financial, or they may act as spur for governments to do so in order to attract them.
They may be able to provide essential goods that are not available domestically. More Efficient Resource Allocation MNC activities along with liberalized world trade can lead to more efficient allocation of world resources. This also limits the ability of host countries to acquire new technologies.
In some cases it is argued that MNCs have too much power, because of their size, and so gain large tax advantages or even subsidies, reducing potential government income in developing countries. Along the same lines, it is argued that MNCs have too much power internationally.
Their incomes and size allow them to exert too much influence on policy decisions taken in institutions such as the WTO. Governments have rules to prevent firms from abusing their ability to use transfer pricing to minimize their tax payments, but these are difficult to monitor and enforce, particularly for developing country governments.
Many MNCs buy and sell inputs and intermediate products in trade with their various affiliates in other countries. The MNCs tell the local tax authorities in the developing country that the prices they have paid for the purchase of inputs from their affiliates abroad is higher than the actual price paid.
As a consequence their profits appear lower than their truth profits. Since the amount of tax paid is a percentage of profit, lower stated profits means lower taxes. While this is good for the MNC, it is damaging for the environment of the host country. In the same way, MNCs may set up in countries where labor laws are weak or almost non-existent, allowing exploitation of local workers through low wage levels and poor working conditions.
There may be significant unrest as host country nationals see that the profits from their resources are being sent out of the country to foreigners. This will not greatly improve employment in the country. It is argued that MNCs should use appropriate technology, where production methods are aligned to the resources available. Since developing countries usually have a large supply of cheap labour, the argument is that labour-intensive production methods would be more appropriate.
This means they transfer their profits out of the country back to the MNCs country of origin. The extent to which FDI is able to contribute to this development depends very much on the type of investment and the ability of the host country government to appropriately regulate the behavior of MNCs and use the benefits of the investment to achieve development objectives.
This is known as corporate social responsibility CSR. The policies outline the firms commitment to support human rights, employee rights, environmental protection, sustainable development, and community involvement. The extent to which such policies are consistently followed and the extent of their actual effect on workers, the workers communities, and the environment is uncertain, but it is usually regarding as a step in the right direction. The latest edition was published in July To see more of our products visit our website at Andrew Threadgould.
All rights reserved. Foreign Direct Investment. The UK trades a high value of goods and services with other countries each year. Exports — goods and services the. Similar presentations. Upload Log in. My presentations Profile Feedback Log out. Log in. Auth with social network: Registration Forgot your password? Download presentation. Cancel Download.
Foreign direct investment creates new jobs, as investors build new companies in the target country, create new opportunities. This leads to an increase in income and more buying power to the people, which in turn leads to an economic boost. Development of Human Capital Resources. One big advantage brought about by FDI is the development of human capital resources, which is also often understated as it is not immediately apparent. Human capital is the competence and knowledge of those able to perform labor, more known to us as the workforce.
The attributes gained by training and sharing experience would increase the education and overall human capital of a country. Its resource is not a tangible asset that is owned by companies, but instead something that is on loan. With this in mind, a country with FDI can benefit greatly by developing its human resources while maintaining ownership.
Tax Incentives. Parent enterprises would also provide foreign direct investment to get additional expertise, technology and products. As the foreign investor, you can receive tax incentives that will be highly useful in your selected field of business. Resource Transfer. Foreign direct investment will allow resource transfer and other exchanges of knowledge, where various countries are given access to new technologies and skills.
Reduced Disparity Between Revenues and Costs. Foreign direct investment can reduce the disparity between revenues and costs. With such, countries will be able to make sure that production costs will be the same and can be sold easily. Increased Productivity. Increment in Income. With more jobs and higher wages, the national income normally increases. As a result, economic growth is spurred.
Take note that larger corporations would usually offer higher salary levels than what you would normally find in the target country, which can lead to increment in income. Hindrance to Domestic Investment. Risk from Political Changes. Because political issues in other countries can instantly change, foreign direct investment is very risky. Plus, most of the risk factors that you are going to experience are extremely high. Negative Influence on Exchange Rates.
Foreign direct investments can occasionally affect exchange rates to the advantage of one country and the detriment of another. Higher Costs. It reduces the cost to profit ratio. When there are local assets in place in foreign countries, it costs less to produce the needed number of products.
This means it takes fewer sales to create a profit. With a reduction of the cost to profit ratio, long-term profits can be achieved with continued investments into the FDI infrastructure because each investment has the potential to lower the costs even further.
It changes the market dynamics for local businesses. Although there is a clear benefit to the international business in establishing local resources, this comes at a disadvantage to local businesses that are already in place. A local economy only has a finite amount of resources available to it and FDI takes those resources away from those who are local so the international corporation can find more success. One of the issues of FDI is that it creates circumstances where prices are lower, but they can wind up being too low sometimes.
Eventually each company undercuts each other to the point where the price structure is not sustainable. Consumers might initially benefit, but eventually the quality of the product suffers, organizations go out of business, and then prices go up anyway. It creates a form of dependence on the corporation for local economy stimulation. As FDI develops internationally, local economies begin to depend upon it more and more.
This ultimately means that some products wind up being at a lower cost at the expense of others who are paying a high personal cost to keep their own benefits. Politics can make or break a foreign direct investment.
The situation in Greece is a prime example of how a foreign direct investment has a unique set of risks. Sometimes assets may be seized in order to manage debt from other poor investment strategies. When this occurs, the entire investment is at risk and this is a risk that always exists. It can become a black hole of labor. They want someone to come in and save them. The goal of an investment is to make life easier, not more difficult, which is why FDI is not always the best solution in every single circumstance.
A company may find itself competing with itself for a market share. The goal of a foreign investment is to enter into a new market, but thanks to the internet, even small businesses today can have an international presence. A direct investment may create better overall local brand recognition, but it may also mean that a company begins competing with itself, especially when the investment is made into a foreign business instead of physical assets.
As corporations focus their resources toward international development, a service gap invariably develops in the domestic economy where that corporation is located. This gives local businesses and entrepreneurs the opportunity to step in and fill that gap, creating the chance to develop their own opportunities for profit in the process.
It keeps prices low for consumers. Both parties win. There is the possibility of a huge return. Many investments wind up being stock when it comes to a business-to-business transaction. A direct investment gives a business the opportunity to earn a share of all potential returns, which means there is always the possibility of a huge return that can be achieved.
Even in business-to-business transactions, there is more control received by the investor. Investors have the chance to be involved in the direction of local economies or foreign company decisions with their foreign direct investment with the right role being negotiated. Although this increases the liabilities that are assumed, especially to fees and fines, there is still an ability to actively continue participation in the business. A limited partnership even removes personal assets from liability in most circumstances.
It reduces the cost to profit ratio. When there are local assets in place in foreign countries, it costs less to produce the needed number of products. This means it takes fewer sales to create a profit. With a reduction of the cost to profit ratio, long-term profits can be achieved with continued investments into the FDI infrastructure because each investment has the potential to lower the costs even further.
It changes the market dynamics for local businesses. Although there is a clear benefit to the international business in establishing local resources, this comes at a disadvantage to local businesses that are already in place. A local economy only has a finite amount of resources available to it and FDI takes those resources away from those who are local so the international corporation can find more success.
One of the issues of FDI is that it creates circumstances where prices are lower, but they can wind up being too low sometimes. Eventually each company undercuts each other to the point where the price structure is not sustainable. Consumers might initially benefit, but eventually the quality of the product suffers, organizations go out of business, and then prices go up anyway. It creates a form of dependence on the corporation for local economy stimulation.
As FDI develops internationally, local economies begin to depend upon it more and more. Tags: direct foreign investment xenophobia. Latest Highest Rated. Title: Foreign Direct Investment 1 Foreign Direct Investment Chapter Thirteen Eitman, Stonehill, Moffett 2 Reasons for investment markets raw materials production cost reduction technology transfers reduction of political risk 3 Economies of scale Scope scale economies production finance research development transportation purchasing marketing scope economies finance marketing 4 Product factor markets new product markets barriers to entry reduction of barriers factor markets labour money capital technology goods resource 5 Defensive investments product cycle - cigarette industry declining N.
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