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Chapter
7 Outline
Chapter Summary
This chapter examined governments' influence on firms' decisions
to invest in foreign countries. By their choice of policies, both host-country
and home-country governments encourage and restrict FDI. We also explored
the factors that influence negotiations between a host-country government
and a firm contemplating FDI. The chapter made the following points:
- An important determinant of government policy toward
FDI is political ideology. Political ideology ranges from a radical
stance that is hostile to FDI to a noninterventionist, free market stance.
Between the two extremes is an approach best described as pragmatic
nationalism.
- The radical view sees the MNE as an imperialist tool
for exploiting host countries. According to this view, no country should
allow FDI. Due to the collapse of communism, the radical view was in
retreat everywhere by the end of the 1990s.
- The free market view sees the MNE as an instrument for
increasing the overall efficiency of resource utilization in the world
economy. FDI can be viewed as a way of dispersing the production of
goods and services to those locations around the globe where they can
be produced most efficiently. This view is embraced in principle by
a number of nations; in practice, however, most are pragmatic nationalists.
- Pragmatic nationalism views FDI as having both benefits
and costs. Countries adopting a pragmatic stance pursue policies designed
to maximize the benefits and minimize the costs of FDI.
- The benefits of FDI to a host country arise from resource-transfer
effects, employment effects, balance-of-payments effects, and its ability
to promote competition.
- FDI can make a positive contribution to a host economy
by supplying capital, technology, and management resources that would
otherwise not be available. Such resource transfers can stimulate the
economic growth of the host economy.
- Employment effects arise from the direct and indirect
creation of jobs by FDI.
- Balance-of-payments effects arise from the initial capital
inflow to finance FDI, from import substitution effects, and from subsequent
exports by the new enterprise.
- By increasing consumer choice, foreign direct investment
can help to increase the level of competition in national markets, thereby
driving down prices and increasing the economic welfare of consumers.
- The costs of FDI to a host country include adverse effects
on competition and balance of payments and a perceived loss of national
sovereignty.
- Host governments are concerned that foreign MNEs may
have greater economic power than indigenous companies and that they
may be able to monopolize the market.
- Adverse effects on the balance of payments arise from
the outflow of a foreign subsidiary's earnings and from the import of
inputs from abroad.
- National sovereignty concerns are raised by FDI because
key decisions that affect the host country will be made by a foreign
parent that may have no real commitment to the host country and the
host government will have no control over them.
- The benefits of FDI to the home (source) country include
improvement in the balance of payments as a result of the inward flow
of foreign earnings, positive employment effects when the foreign subsidiary
creates demand for home-country exports, and benefits from a reverse
resource-transfer effect. A reverse resource-transfer effect arises
when the foreign subsidiary learns valuable skills abroad that can be
transferred back to the home country.
- The costs of FDI to the home country include adverse
balance-of-payments effects that arise from the initial capital outflow
and from the export substitution effects of FDI. Costs also arise when
FDI exports jobs abroad.
- Home countries can adopt policies designed to both encourage
and restrict FDI. Host countries try to attract FDI by offering incentives
and try to restrict FDI by dictating ownership restraints and requiring
that foreign MNEs meet specific performance requirements.
- A firm considering FDI usually must negotiate the terms
of the investment with the host government. The object of any negotiation
is to reach an agreement that benefits both parties. Negotiation inevitably
involves compromise.
- The outcome of negotiation is typically determined by
the relative bargaining powers of the foreign MNE and the host government.
Bargaining power depends on the value each side places on what the other
has to offer, the number of comparable alternatives available to each
side, and each party's time horizon.
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