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Requirement
Explain in detail the advantages and disadvantages of foreign investment to the recipient country. Include one or more real world examples to support your arguments.
Solution
Foreign Investment
It is related to the investment which is made by an individual of foreign or by a business in the constructive capacity of some other country. It can be measured as the capital’s movement across national borderlines in such a way that enables the investors to have a direct control on the investment. The business firms which provides foreign direct investment are known as multinational companies. The investors can directly invest in the businesses which are the existing ones and can also promote them. There are two types of foreign direct investment i.e. outward and inward (Lall et al., 2013). The accretive of both results in net foreign direct investment inflow. Foreign direct investment is allowed freely in most of the sectors except few like defense, coal, and lignite, etc. as foreign direct investment is not permitted beyond the ceiling.
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Foreign direct investment plays the significant role in the developing countries. As they enact the source of long term for the capital and as a source of developed and advanced technologies as well. Foreign direct investment helps in maximizing employment and the international trade. The investment is non-volatile and non-debt, and the received returns are mostly spent on host country for the development (Moran, T. H. 2012). The developing country i.e. Asia fascinated more foreign investment that the United States and the European Union. The developed countries also require the investment for the cross border but for distant reasons. In 2014, the world foreign direct investment reduced 16 percent to $1.2 trillion. After increasing 9 percent to $1.46 trillion in 2013. The foreign investment is in various forms like foreign loans, portfolio investment, etc. The foreign loans are used for the infrastructure. The foreign investment and economic growth are interlinked (Yarbrough et al., 2014). As the countries require a large inflow of foreign investment in order to gain a sustainable competitive advantage.
The Advantages of Foreign Investment to the Recipient Country
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Easy International Trade- The countries have an own tariff on import, and this makes the trading difficult. But the recipient country gets an advantage of foreign investment as the international trade becomes easy in order to make sure that the goals and sales are adequately met.
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Boost in Employment and Economy- The recipient country gets the advantage in order to develop new jobs, and the new companies are built in that country to explore new opportunities. Further, the income and buying power of people is maximized, and this boosts the economy.
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Development of Human Capital Resource- The recipient country gets the advantage of developing the human capital resource. As it is a knowledge of people, who works as labor. The characteristics which are achieved by the training and development helps in maximizing the human capital of the country.
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Reduction in Disparity between Cost and Revenues- The recipient country gets the advantage of the foreign investment in order to ensure that the cost of production will be equal and would be easily sold by reducing the disparity between revenue and cost.
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Increment in Income- The recipient country gets the biggest advantage from the foreign investment as the income gets incremented. As the jobs are increases with the higher salaries and wages which further maximizes the national income. And as an outcome, the economic growth is encouraged.
Therefore, the recipient country gets the management of best practices, legal guidance and accounting from the investors (Blomstrom, M. 2014). They can use the new technology and innovations in the practices of operations.
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Place Your OrderThe Disadvantages of Foreign Investment to the Recipient Country
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Risk of Political Changes- The recipient country faces the political issues because the changes occur instantly and the foreign investment becomes risky. And also the factors which rise because of the changes are very high.
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Negative Impact on the Exchange Rate- The foreign investment impacts the exchange rate occasionally in order to benefit the recipient country and damage the other.
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Non-Viability of Economy- The foreign investments are the capital intensive according to the perception of investors of the recipient country, it becomes non-viable and risky sometimes.
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Negative Affect on the Investment of the Country- The recipient country gets impacted negatively because of the rules and regulations which are governed by the foreign exchange rate. As a result, the investment might get banned and will become impossible to chase an opportunity.
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Modern-Day Colonialism of Economy- Various countries of the third world are afraid that the foreign investment would impact in various types of modern day colonialism of economy that further uncloak the recipient country and leave them endangered in order to explore new opportunities.
Therefore, the countries should not enable much foreign ownership of the businesses in the significant industries (Moosa, I. 2016). As this reduces the advantage of comparative of that recipient country.
Real World Example
China overhauls the US as one of the leading recipients of foreign investment. In 2014, China became the largest recipient of foreign investment by overhauling the US since 2003. The UNCTAD (United Nations Conference on Trade and Development) stated that the foreign investment inflow of china was maximized by 3 percent to $129 billion in the year 2014. Whereas, the US faced the reduction in foreign investment inflow to $86 billion. The sales of cross-border merger and acquisitions in the US reduced from $10 billion in the year 2014. Therefore, the UN body was liable for the international trade. The Hong Kong, region of China received $111 billion of inflow of foreign investment in 2014.
The foreign direct investment reduced because of the delicacy of the global economy, geopolitical risks and the uncertainty of the policy. The flow of foreign investment decreased by 14 percent because of the high divestment in the US. Further, the recovery of the economy in the US reduced the prices of oil and the policy of monetary in the Eurozone in order to encourage flow of foreign investment ("The Wall Street Journal & Breaking News, Business, Financial and Economic News, World News and Video," 2016). According to the UN body, the outlook for the global economy, volatility in the commodity and the currency of the market and upraised risks of the geopolitics negatively impacts the flows of the foreign investment.
References
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Blomstrom, M. (2014). Foreign Investment and Spillovers (Routledge Revivals). Routledge.
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Lall, S., & Narula, R. (Eds.). (2013). Understanding FDI-assisted economic development. Routledge.
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Moosa, I. (2016). Foreign direct investment: theory, evidence, and practice. Springer.
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Moran, T. H. (2012). Foreign Direct Investment. John Wiley & Sons, Ltd.
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The Wall Street Journal & Breaking News, Business, Financial and Economic News, World News and Video. (2016). The Wall Street Journal. Retrieved 3 November 2016, from http://www.wsj.com/
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Yarbrough, B. V., & Yarbrough, R. M. (2014). Cooperation and governance in international trade: The strategic organizational approach. Princeton University Press.
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