To a greater or lesser degree, many governments can be considered pragmatic nationalists when it comes to foreign direct investment (FDI); this means it has both benefits and costs. FDI can benefit a host country by bringing capital, technology, and jobs, and it can also have a negative effect on a country's balance of payments. Accordingly, government policies are shaped by a consideration of these costs and benefits of FDI. 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 multinational enterprises (MNE) meet specific performance requirements.
Roll over each item on the left to read its description. Determine whether the scenario represents a benefit or cost to the home or host country, and then drag it to the appropriate place on the chart.
HOST-COUNTRY BENEFIT HOST-COUNTRY COST
HOME-COUNTRY BENEFIT HOME-COUNTRY COST
-outflow of earnings from a foreign subsidiary
a- loss of jobs
b-inflows of foreign earnings
c-substitute for imports
d-loss of economic independence
e-increase in direct and indirect empolyment
f-skills that can be leveraged internationally
g-loss of local entreprenurship
h-Host country limits profit expatriation
i-transfer of new technology

Home Country Benefit

b - inflows of foreign earnings.

The Company operating in the Host Country will send some of it's profits back to it's Home Country and this will be treated as Foreign Earnings.

f-skills that can be leveraged internationally.

The Home Country will gain skills from their experience in the Host Country. These skills can then be used to be competitive on the global market.

Home Country Cost

a- loss of jobs

The Home Country would lose the jobs that it's companies created in the Host Country. These are jobs that could have employed people in the Home Country but now employ people in the Host Country.

h-Host country limits profit expatriation

In order that they don't lose too much money to the Home Country, the Host Country might come up with laws that limit the amount of money that can be taken out from the country this limiting the amount of foreign Earnings that the Home country gets.

Host Country Benefit

c-substitute for imports

The products that the companies founded by FDI are producing could have been products that the Host Country used to import. Now that the goods are being made in the Host Country, there will be no need for imports.

e-increase in direct and indirect employment

The companies founded by FDI in the Host Countries will create employment for people in the company which is direct employment. Many auxiliary services such as drivers and caterers as an example will also spring up to take care of these newly employed folk thereby creating indirect employment.

i-transfer of new technology

The Company formed from FDI will bring with them technology from the Home Country that could be very beneficial to the Host Country.

Host Country Costs.

- Outflow of earnings from a foreign subsidiary

The Companies established through FDI will send some of their profits back to their home Countries. This means that the earnings would leave the Host Country instead of being reinvested in them.

d-loss of economic independence

These FDI companies tend to get very influential and powerful in the Host Country and can sometimes dictate policies. This would mean the companies have significant control over the resources of the Host Country which will lead to a loss of Economic independence. This is the main reason most people believe that China is interested in Africa.

g-loss of local Entrepreneurship

These companies created by FDI will bring with them better technology and capital that will enable them to be very competitive in the local Economy. This will discourage local Entrepreneurs who do not have the economic nor the financial backing to challenge the companies without making huge losses.

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