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Foreign Direct Investment

Foreign Direct Investment. Unit 2: Module 3. Global liberalization and the recent expansion of the amount of business being conducted among different countries have resulted in a tremendous increase in the amount of financial investment flows among countries.

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Foreign Direct Investment

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  1. Foreign Direct Investment Unit 2: Module 3

  2. Global liberalization and the recent expansion of the amount of business being conducted among different countries have resulted in a tremendous increase in the amount of financial investment flows among countries. • One of the principal entities driving these developments is the multinational or transnational corporation. The Origins of Foreign Direct Investment

  3. A multinational or transnational corporation is a business entity which has operations in multiple countries. • Another definition: • A multinational corporation (MNC) or transnational corporation is a firm that operates in more than one country, that is it is a business with a parent company based in one country but production or service operations in at least one other country. Multinational/Transnational Corporations

  4. Some of the largest MNCs in the world are: • The Coca Cola corporation • Ford • Nestle • McDonald’s • Hilton Hotels Examples of MNCs

  5. Multinational corporations act as a channel through which investments flow among countries. • Through their activities MNCs provide foreign direct investments (FDI). • FDI should not be confused with portfolio investments which is the purchase of shares by foreign investors in business that are located in another country. Points to Note:

  6. Defintion 1 • Foreign Direct Investments (FDI) refers to investments undertaken by a company in the productive assets located in a foreign country. • Definition 2 • Foreign Direct Investments (FDI) is investment that is necessary to produce or sell a good or service in a foreign country, that is capital flows into a country usually from multinational corporations. Foreign Direct Investments

  7. Foreign direct investments can be done through either: • The outright purchase of a foreign company. • The establishment of new operations of an existing business in a foreign country. Foreign Direct Investments

  8. FDI generates capital to meet deficiencies in savings in developing countries. • Generation of employment • Generation of foreign exchange • Increases government’s tax revenue in the host country. • Improved productivity from the transfer of managerial skills and technology • Acquisition of new technology and specialist equipment • (Examine in terms of BOP and effect on balance of payments) Arguments in Favour of FDI

  9. Repatriation of profits • Increased imports • Tax concessions and transfer pricing • Monopoly power: MNCs dominance • Inappropriate technology • Political influences • Exacerbates inequality : dualistic income structures. Arguments against FDI

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