BUS350 - Ch.7

Thebalanceofpayments

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Unformatted text preview: of 51 Host Country Costs 1. Adverse Effects on Competition Host governments worry that the subsidiaries of foreign MNEs operating in their country may have greater economic power than indigenous competitors because they may be part of a larger international organization • As part of a larger organization, the MNE could draw on funds generated elsewhere to subsidize costs in the local market • Doing so could allow the MNE to drive indigenous competitors out of the market and create a monopoly position 33 of 51 Host Country Costs 2. Adverse Effects on the Balance of Payments There are two possible adverse effects of FDI on a host country’s balance‐of‐payments • with the initial capital inflows that come with FDI follows the subsequent outflow of capital as the foreign subsidiary repatriates earnings to its parent country • when a foreign subsidiary imports a substantial number of its inputs from abroad, there is a debit on the current account of the host country’s balance of payments 34 of 51 Host Country Costs 3. National Sovereignty and Autonomy Many host governments worry that FDI is accompanied by some loss of economic independence • Key decisions that can affect the host country’s economy will be made by a foreign parent that has no real commitment to the host country, and over which the host country’s government has no real control 35 of 51 Home Country Benefits The benefits of FDI to the home country include 1. the effect on the capital account of the home country’s balance of payments from the inward flow of foreign earnings 2. the employment effects that arise from outward FDI 3. the gains from learning valuable skills from foreign markets that can subsequently be transferred back to the home country 36 of 51 Home Country Costs The most important concerns (costs) for the home country center around 1. The balance‐of‐payments • The balance of payments suffers from the initial capital outflow required to finance the FDI • The current account is negatively affected if the purpose of the FDI is to serve the home market from a low‐cost production location • The current account suffers if the FDI is a substitute for direct exports 37 of 51 Home Country Costs 2. Employment effects of outward FDI • If the home country is suffering from unemployment, there may be concern about the export of jobs 38 of 51 International Trade Theory and FDI International trade theory suggests that home country concerns about the negative economic effects of offshore production (FDI undertaken to serve the home market) may not be valid • FDI may actually stimulate economic growth by freeing home country resources to concentrate on activities where the home country has a comparative advantage • Consumers...
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This document was uploaded on 03/05/2014.

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