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Foreign Direct Investment Assignment

The document discusses the advantages and disadvantages of foreign direct investment (FDI). It outlines several key advantages of FDI for host countries, including increased employment, improved balance of payments, technology transfer, and increased tax revenue. However, it also notes some disadvantages, such as uncertainty due to companies moving operations abroad, manipulation of transfer pricing to reduce tax obligations, environmental damage, and increased control over host country policies.

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Raja Ahsan Tariq
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60 views

Foreign Direct Investment Assignment

The document discusses the advantages and disadvantages of foreign direct investment (FDI). It outlines several key advantages of FDI for host countries, including increased employment, improved balance of payments, technology transfer, and increased tax revenue. However, it also notes some disadvantages, such as uncertainty due to companies moving operations abroad, manipulation of transfer pricing to reduce tax obligations, environmental damage, and increased control over host country policies.

Uploaded by

Raja Ahsan Tariq
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Tittle

Assignment

Topic
Advantages and Disadvantages of FDI

Student Name
Ahsan Tariq

Student Id
33643

Submitted To
Dr. Abdul Karim Rana

Submission Date
10/01/2021
Foreign Direct Investment

It is an investment made by an individual or firm in one country into business interests located in
another country. Usually, it takes place when an entrepreneur creates foreign business operations
or purchases assets of foreign business.

Advantages of FDI 

Host countries always have motive of attracting FDI by providing certain benefits to foreign
companies such as tax incentives, preferable tariffs etc. MNCs have following main advantages
to the economy.

 Employment

When MNC invests in new plants instead of investing in existing firm, it will increase
employment. Most MNCs make investment in under development countries where investment is
low, employment is low, less industries etc. MNCs creates both the direct and indirect
employment. Direct employment will be increased by creating new job opportunities in new
production plant. Indirect employment will be increased because MNCs will boost the local
economy and businesses in the country by increasing the incomes and expenditures of the
people. They also establish new supply networks in the country.

 Balance of payments

FDI improves balance of payments in different ways. Firstly it will raise inflow of capital to the
country resulting in GNP growth. Secondly it will result in both import substitutes, the products
that the country were importing previously now they are produced domestically and export
promotions will be enhanced as most MNCs use their production facilities as export platforms.

 Technology Transferred

MNCs bring advanced technology in the host country. The local businesses copy the production
technology and working practices of the MNCs then implement that advanced technology in
their operations. Rather than copying the technology, workers doing jobs in the MNCs learn it
through trainings. When they leave the jobs and move to the other domestic companies of same
sector or other sector, they take their new skills and technical knowledge with them.
 Taxation

Now as MNCs are the domestic producers, tax is imposed on them by the host government.
These MNCs are highly profitable firms so the large amount of tax will be collected from them.
In this way they are advantageous for growth of the country and contribution to the public
finance.

Disadvantages

MNCs also have certain disadvantage on the host country. The main disadvantages are as
follows:

 Uncertainty

MNC has ability to shut down their production and move to other low cost country which suits
its best is known as footloose. This happens when the MNC has to incur huge cost for updating
its plant and when without greater loss the plant can be easily sold. Cost cutting may be
important during the maturity and decline stage of the product life cycle. This is also a reason for
MNCs to move to the lower cost countries. This ability of MNCs have a major threat to the
economy when there is large business sector is of MNCs as big taxpayers and faced great
uncertainty in the long term.

 Transfer pricing

MNCs can manipulate by using transfer pricing concept. They use this method for allocating
profits among their different subsidiary and affiliate companies that are part of the holding
company. MNCs misuse this practice by transferring partly finished products from the
company’s one division to another. In this way these companies can reduce their profits in
countries having high tax rates and increase their profits in countries having low tax rates. For
example ABC Co., a U.S. based pen company manufacturing pens at a cost of 10 cents each in
the U.S. ABC Co.’s subsidiary in Canada, XYZ Co., sells the pens to Canadian customers at $1
per pen and spends 10 cents per pen on marketing and distribution. The group’s total profit
amounts to 80 cents per pen. Now, ABC Co. will charge a transfer price of between 20 cents and
80 cents per pen to its subsidiary. In the absence of transfer price regulations, ABC Co. will see
where the tax rates are lower and seek to put more profit in that country. Thus, if U.S tax rates
are higher than Canadian tax rates, the company is likely to assign the lowest possible transfer
price to the sale of pens to XYZ Co.

 Environment

Most MNCs are responsible for destroying natural resources of the host nations. They use natural
resources immensely for their production purposes which is harmful for environment of the
countries. Host countries especially developing nations allow them to do so. They are more
concern with short term gains from the MNCs rather than long term damage of the environment
that these MNCs are causing by eliminating the natural resources. Governments of these
countries are concerned with their short run political success rather than the long run benefit of
the people.

 Control

The ability of MNCs that they can easily close their operations in one country and shift to
another, allow them to put great pressure on government of the host country. It especially
happens in developing nations where MNCs have captured huge industrial areas and also major
wealth creators of the economy, paying large amounts of taxes. Because of these reasons MNCs
have greater control over polices made by government of the country and can enjoy their own
interests.

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