4.9.7 Balance-of-payments (BOP) effects
The term balance-of-payments refers to accounts which a country maintains to keep track of capital inflow and outflow. There are two main accounts:
- Current account
Current account records the exports and imports of goods and services. A current account surplus (trade surplus) occurs when a country exports more than it imports. A current account deficit (trade deficit) occurs when a country imports more than it exports. - Capital account
Capital account records the purchase or sale of assets by the country.
These accounts must balance each other through the accounting convention of double-entry bookkeeping. Thus, every international transaction enters the BOP twice - once as a credit and once as a debit.
From the BOP perspective, FDI has a number of potential consequences for a host country:
- When an MNE makes an investment, the capital account of the host country registers a credit - a one-off credit.
- Earnings from the investment - repatriated profit - will register as a debit on the host country's capital account.
- If the FDI is a substitute for imports, the current account of the host country will register credits.
- If the MNE uses the host country investment to produce exports, again the current account will register credits.
BOP is a complex topic, but you should be aware of the four fundamentals listed above. Now work through your textbook's discussion of the benefits of FDI to host countries. As this discussion focuses more on the US BOP, an Australian version is provided in an additional reading. If you would like to further study BOP from an Australian viewpoint, see the latest publication A Guide to Australian Balance of Payments and International Investment Position Statistics available on the Australian Bureau of Statistics website at http://www.abs.gov.au.
In your text
Hill 2005, Chapter 7, pp. 244-251.
Reading 4.2
Mahoney, D., Trigg, M., Griffin, R. and Pastay, M. 2001, International Business: A Managerial Perspective , 2 nd edn, Prentice Hall, Frenchs Forest, New South Wales, Australia, pp. 166-181: 'The balance of payments accounting system'.
We now look at the other side of FDI from the perspective of the host country. What are the costs of FDI?
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