Friday, July 22, 2011

globalisation and effect of fdi to host countries

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What is globalisation? Defined in ordinary language it means the deregulation of financial markets, the privatising of government enterprises, and the dismantling of barriers to the free movement of goods and services between countries.

For the first time in history almost the entire world population lives in a global capitalist system with the aim of free movement of goods and services. The drive for globalisation is economic growth and prosperity, especially for poorer nations whose economies have often been the most restrictive in the past.

The problem is the irrational nature of the global market, coupled with the extreme vulnerability of the poorest and most marginalised in emerging economies to sudden changes in exchange, interest rates, or big investment decisions. Globalisation therefore can sometimes be destabilising.

According to one school of thought FDI is a double edge weapon which cuts both ways. This notion has been proved by a study wherein it is pointed out that those who run the global economy do not know what they are doing as the belief in regard to lifting controls on the movement of capital would rejuvenate economies, maximise the efficiency of capital utilisation and prevent capital flight has been lost during the last few years.

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It is also believed that what is against the concept of short-term capital flows which lead to destabilisation effect to weak nations is also true in case of FDI. If FDI flows are not properly managed then they could destabilise weak host nation.

Through their choice of polices, governments of countries that are the hosts to FDI can both encourage and restrict FDI. Host governments can encourage FDI by providing incentives for foreign firms to invest in their economies, and they can restrict FDI through a variety of laws and policies.

The Benefits of FDI to Host Countries

There are three main benefits of foreign direct investment for a host country-

• The resources-transfer effects-FDI can make a positive contribution to a host economy by supplying capital, technology, and management resources that would other be not available.

• Employment effects-FDI brings jobs to a host country that would otherwise not be created there. Employment effects are both direct and indirect. Direct effects arise when a foreign MNE directly employs a number of host-country citizens. Indirect effects arise when jobs are created in local suppliers as a result of the investment and when jobs are created because of the increased spending in the local economy resulting from employees of the MNE.

• Balance of payments effects-FDI’s effect on a country’s balance of payments account is an important policy issue for most host governments. There are three potential consequences of FDI.

1. The capital account of the host country benefits from the initial investment.

. If the FDI is a substitute for imports of goods or services, the effect can be to improve the current account of the host country’s balance of payments.

. When the MNE uses a foreign subsidiary to export goods and services to other countries

The Costs of FDI to Host Countries

There are four main costs of foreign direct investment for a host country-

• Possible adverse effects on competition within the host nation-host governments worry that the subsidiaries of foreign MNEs operating in their country may have greater economic power than indigenous competitors, which could drive indigenous companies out of business and allow the firm to monopolize the market. There is also the infant industry argument mentioned previously.

• Adverse effects on the balance of payments-two main areas of concern. First, set against the initial capital inflow that comes with FDI must be the subsequent outflow of earnings from the foreign subsidiary to its parent company. Such outflows show as a debit on the capital account. Second, concern arises when a foreign subsidiary imports a substantial number of its inputs from abroad-which result in a debit on the current account of the host country’s balance of payments.

• Perceived loss of national sovereignty and autonomy-governments worry that key decisions that can affect their 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.

• Cultural Impact-while foreign investment raises the local standard of living and introduce new products and services previously unavailable locally, people in the host cultures develop new norms, standards, and behaviours, some of which may not be beneficial.

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