Economics FDI Essay

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Foreign Direct Investment
(MNC/TNC/FDI)
Michael Aw, Martin Boyce, James Dobson and Luka
Sevaljevic

Definition
Foreign Direct Investment (FDI) is a long-term investment by private multinational corporations (MNC’s) in countries overseas. If an investment in a firm is FDI, it consists of at least 10% of the ownership of the company. FDI usually occurs in one of 2 ways:
→ Expand their firm into foreign countries by building new or expanding existing facilities(greenfield investment)
→ MNCs merge with or acquire existing firms in foreign countries. MNCs and developing countries...
-Developing countries may be rich in natural resources (e.g. oil and minerals) and MNCs have the technology and expertise to extract these resources. -Some developing countries (e.g. India, China, Brazil) have huge growing markets. This means that there are a lot of potential consumers. With growing incomes, demand for goods will rise.
-Costs of labour tend to be lower in developing countries, which lowers costs of production, which is enticing for MNCs as it provides opportunities to increase profits.
-Government regulations tend to be less severe. As well many developing country governments offer tax concessions to attract FDI.

Guess if you dare...

Examples (p. 378)
→ Burger King Tim Hortons Merger
($11 billion)
→ Toyota Motor Corporation (17000 foreign jobs) Advantages
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FDI helps to fill a savings gap that is often missing in Developing countries and thus may lead to economic growth.
MNCs will bring employment (e.g. General Electric employs 168112 foreign persons) and may also bring training and education. Investments into human capital makes labour more efficient.
Increased employment will have a multiplier effect thus stimulating growth. Inflow of equipment and technology as MNCs bring their technological,
R&D and marketing expertise.
Government may earn additional tax revenue from MNCs and thus use the income on infrastructure, public services and promoting economic development. … Advantages
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Improved consumer welfare through reduced cost, wider choice and improved quality
If MNCs buy existing firms, then they are injecting foreign capital and thus are increasing aggregate demand (economic growth).
Contribution to exports growth
Financial resources to spur improvement of infrastructure of the economy both physical and financial.
Can result in more efficient allocation of world resources
Corporate Social responsibility: may aid the developing country financially or physically to enhance the firm’s image, especially with the
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