Fdi and Its Impact on Host Country

Topics: Macroeconomics, International economics, Income Pages: 5 (1462 words) Published: January 28, 2013
workforce which is of course a benefit for the host countries’ economy as it increases skilled labours in the labour market. In addition, they also inspire other local firms to use new technologies and learn new ways of operating organizations. There is better utilization of resources including the human resource which is indeed beneficial to both the MNCs and the host countries.

Balance of payment
Transaction between one specific country and all other countries in a specified time period is balance of payment. It compares the cash inflow and cash outflow. For a healthy economy there should be balance in cash inflow and outflow. FDI has a vital role in maintaining balance of payment. With the introduction of FDI there is increase in the production and export for a host country. And increasing export increases cash inflow to the host country. Again when host country makes payment to other country or imports goods, there is cash outflow. So this whole process makes balance of payment. Balance of payment is one factor that helps develop the economy of a country and FDI has helped maintain the balance of payments of these countries due to the above mentioned activities.

Multinational enterprises are huge in nature. They need huge workforce to carry out their operations. When an MNC operates in a host country, it provides employment opportunities to many people. Along with employment they provide, good salary and other benefits and allowances. As a result, there is an increase in employment rate, per capita income as well as the standard of living of people improves in that particular country. Indeed, MNCs are a good source of income and employment for the host countries. It is only through the engagement of people in income generation activities that the economy of a country can boost and the financial sector can improve. Coca Cola, KFC, Dabur, Hyatt Regency and Pizza Hut are some of the MNCs operating in Nepal that have been employing huge number of Nepalese workers.

Fair competition
Before MNCs started their operations in the host countries, there could have been local firms that were monopolizing the markets. Consumers in the host country might be paying high prices for certain product and services that are not of good quality. This comes to an end when MNCs enter these markets because MNCs are definitely superior in terms of quality of products and services that they provide. The local firms have to provide good services and products to the customers in order to compete with the MNCs and to continue operating. This consequently improves the productivity, effectiveness and efficiencies of the local firms and the consumers too are directly benefited by quality products and services due to the competition among the firms

Source of income and tax revenue
MNCs are sources of income to the host countries in many ways. One such way through which the host countries can earn huge amount of money is the tax revenue. MNCs are large organisations which operate in large scale and their profit is also big. They are one of the huge tax payers to the host country because tax is paid in terms of profit made. Additionally, the operation of local firms that operate and collaborate with these MNCs too increases. The export of national products in international markets rises up with the links that the local firms can have with the help of MNCs. In the same way, the probability of financial borrowing within the host countries too increases and the interest charged on the huge borrowing is also a source of income to these countries. Thus it is clear that MNCs are good and huge sources of income which eventually improves the economies of the host countries.

Negative effects of FDI in host country

Transfer pricing
Transfer price is the price that an organisation buys or transfers its product and services from its subsidies organisation or related organisation. The main objective of FDI is to generate...
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