Global Business - Question 12

Inward Foreign Direct Investment(FDI) give rise to several gains for the host country. Some of the major benefits are:

Resource Transfer Effects: Foreign direct investment can have a productive consequence on the host economy by providing capital, technology and management resources. There are large number of multinational organisations that have accessibility to the financial resources because of their huge size and economic soundness. They could supply these riches that would otherwise not available to the host economy (Ghebrihiwet & Motchenkova, 2017). Evidence suggests that the technology transferred to developing nations through FDI tends to be latest than the host country and are more environment friendly. Moreover, FDI transfers new skills, new managerial and organisational practice, thereby expanding the current capital of knowledge of the host economy. Such resource transfer would foster economic expansion of the host country (Vacaflores et al., 2017).

Employment Effects: Foreign direct investment has primary and secondary effects on human capital utilisation (Jin et al., 2019). A fundamental element for sustainable growth of an economy is that it can easily take in the human resource that is released from agriculture into manufacturing and service industries and the multinationals helps to absorb this human resource.

Balance of Payments Effects: Foreign direct investment have significant potential impacts of balance of payments on the host country. The first and foremost, which is the one time effect is that the capital account of the host economy has gained. This is due to the capital inflow in the beginning from the foreign direct investment. Second potential benefit of FDI is that it can also enhance the current account of the host economy (Konara & Wei, 2019). This is possible in the case where foreign direct investment is a substitute for imports of goods and services. The third potential benefit of FDI is the case where multinational enterprise to export goods and services uses a foreign subsidiary.

A very good example where the host country benefitted from FDI is the case of Moscow. McDonald’s acted as an engine of economic development in Moscow. It brought training in management in the economy (Shukla, 2020). Besides, it encouraged entrepreneurship directly and indirectly. This is through franchises and demonstration effects. It created backward linkages that expand local suppliers (Whyman & Petrescu, 2017) Similarly, there are many other examples where FDI stimulates exports by their suppliers. It has constructive external gains on the productivity, cleanliness and the quality of service in the host economies.

References for Global Business

Ghebrihiwet, N., & Motchenkova, E. (2017). Relationship between FDI, foreign ownership restrictions, and technology transfer in the resources sector: A derivation approach. Resources Policy, 52, 320-326.

Jin, B., García, F., & Salomon, R. (2019). Inward foreign direct investment and local firm innovation: The moderating role of technological capabilities. Journal of International Business Studies, 50(5), 847-855.

Konara, P., & Wei, Y. (2019). The complementarity of human capital and language capital in foreign direct investment. International Business Review, 28(2), 391-404.

Shukla, O. P. (2020). Entrepreneurship Development in India: Role of Foreign Direct Investment and Economic Growth. Journal of Business Management & Quality Assurance (e ISSN 2456-9291), 3(2), 11-22.

Vacaflores, D. E., Mogab, J., & Kishan, R. (2017). Does FDI Really Affect Employment In Host Countries?: Subsidiary Level Evidence. The Journal of Developing Areas, 51(2), 205-220.

Whyman, P. B., & Petrescu, A. I. (2017). Foreign Direct Investment (FDI). In The Economics of Brexit (pp. 123-161). Palgrave Macmillan, Cham.

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