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International and Global Business HI2011 Tutorial Questions Part 02 Meegahage Kalpana M. Perera SDR3029 Holmes 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 the home and host countries. (400 words – Maximum) “Foreign direct investment (FDI) occurs when a firm invests directly in new facilities to 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 industry by providing resources, technology and management resources that would not otherwise be available. Such an exchange of resources can stimulate the economic growth of the host country. 2. Employment effects The employment effects associated with foreign direct investment are immediate and indirect. In countries with relatively little capital but employment, direct or indirect employment opportunities have become key. 3. Balance of payments effects The impact of foreign direct investment on the government balance of payments account 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, and economic growth. The impact of foreign direct investment in domestic market competition is particularly important for services such as telecommunications, retail, and non-export financial services. Cost of FDI to the Host County 1. Adverse effects of FDI on competition within the host nation In terms of how foreign investment competition grows, host governments often fear that foreign multinationals have more economic power than national competitors.
2. Adverse effects on the balance of payments There are two main areas that take into account the contrasting effects of foreign investment 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 a real 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 foreign income 2. Implications for employment arise from external foreign investment 3.The benefits of learning valuable skills from foreign markets can then be transferred to the country Cost 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 for domestic production The country suffers mainly from capital and labour due to foreign direct investment.

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