Cost and Benefits of FDI to Home and Host Countries

Global Business In
Asian Century
7/3/2019

1. Cost and Benefits of FDI to Home and Host Countries
Cost of FDI to Home Country
Capital and employment are the two key elements of the economy of the home
country that are highly affected due to FDI. For instance, a country ‘C’ plans to make an
investment in the country ‘D’, with the help of capital and technological investment the
financial state of the host country improves in comparison to the home country. In fact, in the
future, if the country ‘C’ desires to do any type of advancement, a major priority will be
provided to the country ‘D’. This results in reducing the production and winding up of the
operations in the home country and shifting the complete focus towards the host country.
This majorly influence the employment rate and economy of the home country (Lipsey,
2002).
Benefits of FDI to Home Country
In relation to the balance of payments, what is debit to the host country is credit to the
home country. The outward foreign direct investment results in creating numerous new job
market effective skills and expertise. The effect of reverse resources transfers effects when
resources such as decision-making skills are relocated again to the home country. The foreign
company’s income is transferred to the home country dissimilar to domestic manufacturers
who most of their income contributes to the economy of their nation.
Cost of Foreign Direct Investment to host country
Generally, the adverse effects are called as costs. When a foreign company establishes
its operations in the host country with great technological skills with the capacity to
manufacture high-quality products at cheaper prices, it negatively affects domestic producers
(Kastrati, 2013).

Benefits of FDI to Host country
The time a business invests in the host country, the main resources that are invested
are managerial skills, technology, and capital. In consideration to capital, the host nation
gains improved financial status in comparison to the home country. The modification in the
managerial and technological skills results in a huge impact on the activities performed by the
business. In addition to this, FDI creates huge opportunities for employment for the citizens
of the host country (Moran, 2003).
Some of the examples of cost and benefits of FDI are Renault-Nissan Alliance,
Mexican Maquiladores, US-Malaysia FDI relationship, and McDonald's.
2. Policy instruments used by governments to influence FDI
Policies of Home country
Boosting Outward FDI
There is a number of investor countries which have government-backed programs of
insurance in order to cover a different kind of foreign investment risk. The types of risk that
could be insured by these programs are war losses, incapability to take profit to the home
country, and risks of expropriation. These types of programs are specifically used to inspire
companies to make an investment in the nations with the unstable political environment
(Accounting Department, 2019).
Restricting Outward FDI
Almost all the investor nations, comprising the US, with time have practices control
on the outwards FDI. The common policy that has been used is to limit the outflow of capital
because of the issue of balance of payments of the country. For instance, from the 1960s until