A host country’s balance-of-payments accounts are positively impacted from the initial capital inflow when a MNC establishes the business. Foreign direct investment is a financial account transaction, and thus when a foreign firm buys or builds a new production facility in the host country, it will create a credit to the host nation’s financial account. Moreover, foreign direct investment represents more of a long-term commitment to a nation as compared to investing in stocks and bonds. Thus, FDI is a more stable form of financial account investment. The balance-of-payments accounts for the host country are positively impacted if the FDI substitutes for imports of goods. If consumers in the host country were previously being served by imports from foreign sources of production, these imports will cease if the firm begins production in the host country to serve host country consumers. A shift from foreign to domestic sources of production prevents debits to the current account from being created since product imports will stop. The final positive implication of FDI to a nation’s balance-of-payments accounts is that the MNC may use its foreign subsidiary to export to other countries, thereby creating credits to the host country’s current account.Assume that our hypothetical company Sun Devil Shoes built a production facility in Mexicali, Mexico to manufacture and sell granola bars in Mexico. The establishing of a production source by a foreign-based company would create a credit to Mexico’s financial account. If Sun Devil previously served the Mexican market by selling granola bars imported from the United States, those debits to Mexico’s current account will no longer be created as a result of the new production facility. Finally, if Sun Devil has excess production capacity in Mexicali to be able to not only serve the Mexican market
but also sell granola bars to Brazil, those product exports would create credits to Mexico’s current account.Not all of the consequences of FDI are positive for host countries. FDI can have negative implications for employment and competition, it may make the host country dependent upon the foreign firm, and it can negatively impact the host country’s balance-of-payments accounts. The first concern about FDI is its impact on competition and employment. Although FDI can create direct and indirect employment effects, it also increases the level of competition in a national economy. This increase in competition may result in job losses in less-efficient domestic firms. The substitution employment effects of FDI refer to the fact the nations need to consider the jobs lost due to the new competition in the host country when calculating the net employment effects of FDI.
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