FDI means accepting multinational companies setting up in a country and as FDI increases some countries, especially LDC’s can become over reliant on them and inflows of capital.
MNC’s can set up in an LDC as it is cheaper than other more developed countries. There is the attraction of cheap labour and low setting up costs. The problem for an LDC is that the MNC could choose to leave the country when it pleases, leaving the country with high unemployment as this new factory would probably be a large national employer.
The MNC could also exploit workers by not paying them the wages they are entitled to or paying them the minimum wage or below. MNC’s could also threaten local cultures, for example, in the Middle East employees may be told that they are not allowed to wear certain clothes or follow the correct pattern of their religion during the day.
FDI could also drain a country of their natural resources. If a country lacks the large amounts of capital for resource extraction or lack the necessary skills, foreign investors may offer joint ventures to extract the oil. This could mean that more money is going to the foreign investor than the host country which could limit growth and an increase in capital.
FDI being introduced into an LDC could cause “Bidding wars” for certain ventures among governments and MNC’s that may create major problems in the allocation of investment resources. These “bidding wars” could be costly and weaken public finances, which could again slow down growth in the LDC.
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