4.16 Summary: Part B
In this part we have looked at the political nature of FDI in which governments may adopt one of three stances - the radical, free market or pragmatic. We deduced that most governments adopt a pragmatic view which is consistent with national objectives. We then examined a range of benefits and costs of FDI to both the host and home countries. In general terms the host country benefits from the initial capital inflow and the consequent multiplier effect, the creation of jobs, new technology and the educational effect of (generally) superior management skills. The major cost to the host country is the continuous outflow of earnings from the FDI. The major benefit to the home country is the reciprocal of the host country's major cost - the repatriation of earnings. The major cost to the home country is most likely the loss of jobs, although there is often some compensatory employment in related areas.
We ended with a summary diagram showing the means by which governments encourage or restrict FDI. MNEs can generally rely on their governments to support outward FDI, but those governments may restrict the outflow of capital because of BOP effects, to encourage investment at home, or for political purposes. Potential host countries usually encourage the inflow of capital, albeit with some bargaining for the best deal, and may support it through tax concessions, improvements to infrastructure and so on.
What we have not covered from Chapter 7 is the process by which MNEs negotiate deals with both their home government and the potential host government. You should read Hill's (2005) very adequate exposition of this topic now.
In your text
Hill 2005, Chapter 7, pp. 257-260.
To complete this chapter and help tie together many of the issues discussed across the two Hill (2005) chapters, work through the following reading on FDI in Bulgaria , a country whose economy is in transition.
Reading 4.3
Glaister, K. W. and Atanasova, H. 1998, 'Foreign direct investment in Bulgaria : Patterns and prospects', European Business Review , 98 (2), 122-134.
Activity 4.7
After working through Reading 4.3, consider your answers to the following questions:
- Discuss the impact of government policies on inward FDI by using examples from the article.
- Why are countries such as Bulgaria interested in encouraging inward FDI?
- With all the economic and political problems in Bulgaria , why do foreign organisations wish to invest there?
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