How Does FDI Benefit The Home Country?

How Does FDI Benefit The Home Country?

• The benefits of FDI for the home country include
• The effect on the capital account of the home country’s balance of payments from the inward flow of foreign earnings
• The employment effects that arise from outward FDI through export demand
• The gains from learning valuable skills from foreign markets that can subsequently be transferred back to the home country

What Are The Costs Of FDI To The Home Country?

• The home-country’s balance of payments can suffer
• from the initial capital outflow required to finance the FDI
• if the purpose of the FDI is to serve the home market from a low cost labor location
• if the FDI is a substitute for direct exports

What Are The Costs Of FDI To The Home Country?

• Employment may also be negatively affected if the FDI is a substitute for domestic production
• But, 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
• may stimulate economic growth and employment in the home country by freeing resources to specialize in activities where the home country has a comparative advantage

How Does Government Influence FDI?

• Governments can encourage outward FDI
• government-backed insurance programs to cover major types of foreign investment risk
• Governments can restrict outward FDI
• limit capital outflows, manipulate tax rules, or outright prohibit FDI

How Does Government Influence FDI?

• Governments can encourage inward FDI
• offer incentives to foreign firms to invest in their countries
• gain from the resource-transfer and employment effects of FDI, and capture FDI away from other potential host countries
• Governments can restrict inward FDI
• use ownership restraints and performance requirements