Highlight the potential advantages and disadvantages for the host country of Foreign Direct Investment (FDI) by multinational companies.

Advanced Financial Management Block Revision Mock Exams

The greatest potential beneficial effects of the host country of foreign direct investment are the creation of employment and the stimulation of additional output.
The import of capital which may be relatively scarce resources if the host country is a less developed nation is often accompanied by an infusion of new technology leading to increased productivity.

Additional training and new skills base may be provided for local workers and more advanced management techniques introduced into the country.

Initially the balance of payments of the host country will benefit through the in flow of capital to finance the investment but over time there is likely to be an opposite movement as the multinational company seeks to remit funds to the parent country or elsewhere in the world.

Detrimental effects include:
– The loss or perceived loss of political and economic sovereignty. This is exemplified by multinationals controlling major parts of a country‟s key industries which may be considered undesirable by the country‟s government or strategies or defensive reasons.

– Avoidance of local taxation through transfer pricing and other measures.

– Destabilization of the country‟s monetary policy through large international currency flows by multi-nations.

– The introduction of different cultural values and lifestyles which may undermine indigenous cultures.

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