What are the benefits and costs of FDI to home and host country?
The benefits and costs of FDI to Host country:
- Resource transfer effects
Capital, technology and management resources etc are brought into the host country from the home country to be incorporated into production of products.
- Employment effects
FDI requires employees on the spot, and creates jobs directly and indirectly.
- Balance-of-payments
By creating a surplus, FDI can improve the current account of the host country.
- Effect on competition and economic growth
Another enterprise means competition increases → decrease in price and increase in product quality.
- Adverse effects on competition
Can also end up driving out domestic producers, which is not beneficial to host country.
- Adverse effects on balance-of-payments
Might create a debt on the account instead of surplus.
- Possible effects on national sovereignty and autonomy
If the enterprise becomes extremely influential, this might result in the loss of economic independence. Instead a foreign parent company would be making all economic decisions.
The benefits and costs of FDI to Home country:
- Balance-of-payments
The inward flow of foreign earnings creates a surplus on the current account.
- Employment effects
Foreign subsidiaries creates demand for home-country export, which in return creates job opportunities in the home country.
- Reverse resource transfer effects
Valuable skills learned in the host country can be transferred back to the home country.
- Reverse effects on balance-of-payments
Due to initial outflow of capital used to finance FDI, if the FDI is intended to serve the home country from a low-cost production location, and if it is a substitute for domestic production.