The Political Economy Of
Foreign Direct Investment
Shahadat Hosan
Faculty, MBA Program
Stamford University Bangladesh
7-2
Political ideology and FDI
Radical
View
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Pragmatic
Nationalism
Free
Market
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Radical view
Marxist view, that MNE’s exploit less
developed host countries
Extract profits
Give nothing of value in exchange
Instrument of domination not development
Keep less-developed countries relatively
backward and dependent on capitalist nations for
investment, jobs, and technology
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Radical view
Radical view was popular (1945-80) among
Communist countries (China, Cuba)
Socialist countries in Africa
Nationalistic countries (Iran, India)
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7-5
Free market view
.
Nations specialize in goods and services that
they can produce most efficiently
Resource transfers benefit and strengthen the
host country
Positive changes in laws and growth of
bilateral agreements attest to strength of free
market view
However, all countries impose some
restrictions on FDI
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Pragmatic nationalism
FDI has benefits and costs
Allow FDI if benefits outweigh costs
Block FDI that harms indigenous industry
Court FDI that is in national interest
Tax
breaks
Subsidies
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7-7
Three main ideological positions
regarding FDI
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7-8
Benefits of FDI to host countries
Resource-transfer effects
Capital
Technology
Management
Employment effect
Direct
indirect
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Benefits of FDI to host countries
Balance-of-payments effect.
Current account-surplus/deficit
Capital account
Increases competition and spurs economic
growth
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Resource-transfer effects
Capital
Technology
Management
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Employment effects
Brings jobs that otherwise would not be
created
Direct: Hiring host-country citizens
Indirect:
Jobs created by local suppliers
Jobs created by increased spending by
employees of the multi-national enterprise
Questions remain on whether net jobs gained
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Balance-of-payments effects
Host country benefits from initial capital
inflow when MNC establishes business
Host country records current account debit on
repatriated earnings of MNC
Host country benefits if FDI substitutes for
imports of goods and services
Host country benefits when MNC uses its
foreign subsidiary to export to other countries
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Effect on competition and economic
growth
Increased
productivity growth
product and process innovation
greater economic growth
FDI can
Increase market competition
Lower prices
Create greater consumer choice
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Stimulate capital investments
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7-14
Home country FDI benefits
Improves balance of payments for inward
flow of foreign earnings
Creates a demand for exports.
Export demand can create jobs
Increased knowledge from operating in a
foreign environment
Benefits the consumer through lower prices
Frees up employees and resources for higher
value activities
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Costs of FDI to host countries
Can drive out local competitors or prevent
their development
Profits brought home ‘hurts’ (debit) a host’s
capital account
Parts imported for assembly hurt trade balance
Can affect sovereignty and national defense
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Home country FDI benefits
Improves balance of payments for inward
flow of foreign earnings
Creates a demand for exports
Export demand can create jobs
Increased knowledge from operating in a
foreign environment
Benefits the consumer through lower prices
Frees up employees and resources for higher
value activities
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7-17
Home country problems with FDI
Negative effect on Balance of Payments
Initial capital outflow
MNC uses foreign subsidiary to sell back to
home market
MNC uses foreign subsidiary as a substitute
for direct exports
Potential loss of jobs
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Government incentives for FDI
Risk insurance (Home)
Elimination of double taxation (Home)
Tax incentives (Host)
Low interest rates (Host)
Stable government and stable policies
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Government disincentives for FDI
Limit capital outflows (Home)
Manipulate tax code to encourage domestic
investment (Home)
Political restrictions on investing in certain
countries (Home)
Ownership restraints. (Host)
Performance requirements (Host)
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7-20
Thank You
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