Disadvantages Of FDI

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This article published on the 3rd of November 2017 states that as Africa becomes the second destination with the highest percentage of foreign direct investment (FDI) the anticipated investment inflow into the continent by the end of 2017 should be $57.5 dollars. FDI can be defined as a long lasting investment by multinational corporations (MNCs) that gain direct control.

FDI’s ultimately increases investments in a country which are the securing of a good in the hopes of it generating more wealth in the future. As shown in figure 1, FDI can generate economic growth. When foreign firms invest in a country they spend money on goods, hence there is an increase in both the quantity of demand and supply of goods. MNCs tend
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MSC is equal to MSB at Q2 and this point is called the socially efficient output. This is a lower output than the market equilibrium output which is Q1. Hence, we can see that the MNC’s overproduce goods. This is a form of market failure which causes welfare loss. There is welfare loss because MSC exceeds MSB between Q2 and Q1.
There are a multitude of advantages and disadvantages to FDI. The advantages include economic growth. Economic growth increases income, which then increases access to goods and services, and as a result increases the standard of living. Another advantage is that it creates employment opportunity for the locals. Once again, this increase income and allows the poor to break out of the poverty cycle. The poverty cycle being; low income leads to low investment in health and education which then leads to low productivity which leads right back to low income. If MNCs give the locals a job they can break out of this cycle. Lastly, another advantage of FDI is that it generates tax revenue. The governments collect tax from the MNCs which allows the government to increase spending on merit goods which have positive externalities of consumption. Examples of merit goods include health, education, and
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Negative externalities of production such as pollution affect the health of the citizens which directly affect standards of living. Another disadvantage of FDI is that profits are often repatriated meaning that the profits made by the MNCs are often sent back to the home country. This does not benefit the locals because it might not significantly increase their income. A final disadvantage, is that FDI is very vulnerable to external shock. An external shock can be defined as an unforeseen change in an economic variable which occurs outside the country. An example of this is the increase of the price of oil which could potentially affect a firms cost of production. In this case, if there was a change in the global economy, there could be an outflow of FDI meaning that firms would take their money out of the African countries. This outflow of FDI would then increase