International and Global BusinessHI2011Tutorial Questions Part 02Meegahage Kalpana M. PereraSDR3029Holmes Institute- Melbourne (M1)Lecture – Mr. Ronald Wakyereza
Week 7 – Question 1 (10 marks)Describe both the costs and benefits of Foreign Direct Investment (FDI) to thehome and host countries. (400 words – Maximum)“Foreign direct investment (FDI) occurs when a firm invests directly in new facilitiesto produce and/or market in a foreign country” (Lecture Notes)Benefits of FDI to Host Country 1.Resource transfer effects Foreign direct investment can make a positive contribution to the hospitality industryby providing resources, technology and management resources that would nototherwise be available. Such an exchange of resources can stimulate the economicgrowth of the host country.2.Employment effects The employment effects associated with foreign direct investment are immediate andindirect. In countries with relatively little capital but employment, direct or indirectemployment opportunities have become key. 3.Balance of payments effects The impact of foreign direct investment on the government balance of paymentsaccount is a major political issue for many host governments. 4.Effects on competition and economic growth Greenfield increases the competitiveness of the investment market, reduces costs,and improves customer care, leading to productivity, innovation and innovation, andeconomic growth. The impact of foreign direct investment in domestic marketcompetition is particularly important for services such as telecommunications, retail,and non-export financial services. Cost of FDI to the Host County1.Adverse effects of FDI on competition within the host nation In terms of how foreign investment competition grows, host governments often fearthat foreign multinationals have more economic power than national competitors.
2.Adverse effects on the balance of paymentsThere are two main areas that take into account the contrasting effects of foreigninvestment on the host country's balance of payments. 3.Perceived loss of national sovereignty and autonomy Decisions related to the host country are made by foreign parents who do not have areal relationship with the host country and have no real control over the host country.Benefits of FDI for the home country 1. Impact of the capital account on the balance of payments that is including foreignincome2. Implications for employment arise from external foreign investment3.The benefits of learning valuable skills from foreign markets can then betransferred to the countryCost of FDI to the Home Country 1.The home-country’s balance of payments can suffer 2.Employment may also be negatively affected if the FDI is a substitute fordomestic production The country suffers mainly from capital and labour due to foreign direct investment.