HW4 - Economics 1l5B Dr. Janine L.F. Wilson Homework #4 The...

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Economics 1l5B Dr. Janine L.F. Wilson Homework #4 The Benefits and Dangers of Foreign Capital 1. In an effort to increase economic growth some countries have chosen to encourage foreign investment. a. What are some ways in which a developing country could attractmore foreign' direct investment? (Give 2 detailed examples) Stabilize currency,low tariffsr lower corruption, create a more educated workforce. b. If you were the economic advisor to a developing country, would you advise them to attract'foreign direct investment? Why or why not? Give examples of both advantages and disadvantages presented in lecture and discussion. Advantages - traditional and new growth theory suggest that greater investment and savings will lead to growth, investment brings in foreign exchange through export earnings into the domestic economy, local governments can tax the multinational corporation in order to generate revenue, FDI can involve the transfer of information and technolory to the developing country. Disadvantages-Not as good as if the same investment were from domestic sources; crowds out domestic investment, monopoly agreements with governments stifle local development of firms, do not reinvest profits, imports of intermediate goods do not foster domestic production of intermediate goods, tax contributions often offset by local government subsidies. Also, there are arguments that FDI promotes interests of srnall group of people, divert resources away from food production toward manufactures for wealthy individuals and foreign markets, causes inappropriate consumption patterns through advertising, and multinationals can participate in transfer pricing. c. Would you advise a developing country to instead use foreign portfolio investment? Why or why not? Give examples of both advantages and disadvantages of foreign portfolio investment relative to foreign direct investment presented in lecture and discussion. Advantages
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HW4 - Economics 1l5B Dr. Janine L.F. Wilson Homework #4 The...

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