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Promoting Growth & Development - FDI

The effectiveness of FDI and the role of MNC's

Hugo Flower

on 18 March 2014

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Transcript of Promoting Growth & Development - FDI

FDI and MNC's
The Harrod-Domar Growth Model
Injections and Withdrawals



Technology & Human Capital

Tied Aid

Many countries find it difficult to save or have markets that do not operate sufficiently to maintain the chain

Foreign direct investment; investment by a company in a country other than that in which the company is based.
How do countries encourage FDI?
What are the benefits and drawbacks of allowing a Multi-National Corporation into your country?

Injection: investment, capital and tech (remedy LEDC’s limited capacity to produce capital goods).

Human capital improvement (training, management and entrepreneurial skills).

Provide modern sector jobs (demand for jobs can keep up with growing labour force).

Tax revenues (profits and incomes).

Positive externalities (skills and education improving so benefit local firms and business start-ups)
MNC could be capital intensive so no need for labour, MNC may not hire local workers (China in Africa) = reduced employment.

MNC may pay higher wages than normal to appear good (this can damage local businesses who can’t afford to compete in wages and skew the labour market).

LEDC may have had to lower tax to entice MNC in (so does not receive full benefits), MNC may also manipulate its balance sheets to minimise tax liability (internalise transactions so profits kept in the lowest tax locations – transfer pricing – illegal.

MNC may send profits back to its shareholders (not distributed in local area), although it will still help to raise country’s profile.

MNC may have considerable market power in the local area (put local businesses out of business.

MNC may take advantage of lax environmental regulations.

As MNC often locates in urban areas, this may increase inequality between urban and rural areas.

•It is important that LEDC governments can negotiate a good deal with the MNC. Eg, Indonesia negotiated that a certain proportion of local workers must be employed in 5 years.
FDI into China by country
Source: The World Bank

debt relief

development of human capital

inward looking/outward looking strategies

free market/government intervention approaches

industrialisation; development of tourism; agriculture


fair trade schemes

role of international financial institutions and non-government organisations in promoting growth and development.
Find a case study on one of these measures to promote development and be ready to present next week:
Foreign Direct Investment Summary
Definition: Investment is the increase in the capital stock of a country, increase in capital goods. This will shift LRAS to right, move PPF to right. Foreign direct investment is investment by a foreign company to increase the capital stock in another country on a commercial basis.

•Reduce Savings gap (Harrod-Domar model of economic development).

•FDI might limit the diversification of the domestic economy, leading to excessive dependency on a few primary products (overspecialisation).

•TNCs (MNCs) repatriate profits out of the recipient country to their headquarters. This can damage the current account of the balance of payments.
•TNCs might not have the best interests of the recipient country at heart, and can have excessive political influence. This can increase levels of corruption.
•Many created jobs will be low skill, and expatriate workers contribute less to the domestic economy than do domestic workers.

•Recipient country can become excessively dependent on TNC, and suffer economic and social disruption if the TNC leaves. How committed is the TNC to the success of the country?
•Injection into economy; Shift AD and LRAS to right, increasing real output, including multiplier effect.
•Increase real output and employment.
•Boost Govt tax revenues, which can then be used to redistribute income and invest in infrastructure.
• Improved access to foreign currency.
•Increase productivity through access to latest technology
•This ensures that benefits are not entirely dissipated.
•This is dependent on whether there is any competition from other LEDC’s.
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