FDI and economic development IB Econ Chapter 31

What is FDI?  Foreign Direct Investment is long term investment by private multi national corporations (MNCs) in countries overseas  This can be building new factories or buying existing companies

Why are MNCs attracted to foreign countries  Rich in natural resources such as oil and minerals  Huge and growing markets – if they locate there they have better access to more customers and growing incomes lead to more demand  Costs of labour tend to be much lower in developing countries  Government regulations tend to be less – cost of doing business is less

Advantages associated with FDI  Developing countries tend to have large savings gaps which FDI can fill  MNCs can provide employment and improve the workforce with education and training  Give access to research and development  Multiplier effect of increased employment  Tax revenue from the corporate profits which can be used to help build better infrastructure  MNCs may prompt countries to build infrastructure so that they can operate there  May give consumers more choice and lower prices A significant proportion of China’s exports are produced by foreign firms. Through joint ventures with foreign firms Chinese firms have grown rapidly

Disadvantages associated with FDI  Often bring their own management and only used low skilled workers limiting the host country’s ability to acquire new technologies  Some MNCs will be offered subsidies to locate in a developing country which reduces government revenue available for development  MNCs practice transfer pricing so that they make the least profit in the low tax areas meaning there is very little corporate tax advantage and profits are repatriated to home country  Negative externalities and exploitation of workers due to low levels of regulation  MNCs may strip country of resources and then leave  If they are there for the natural resources they may use capital intensive methods which create little employment Complete Data response on P384