Economics Assignment: Foreign Investment Impacts on Recipient Nations

This economics assignment delves into the multifaceted impacts of foreign investment on recipient countries. It begins by defining foreign investment, differentiating between Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI), and highlighting their roles in economic growth. The essay then explores the advantages, such as market improvement, job creation, and technological advancements, alongside the disadvantages, including potential wage shifts, profit extraction, and economic instability. The analysis uses Australian data to illustrate the correlation between foreign investment and GDP, demonstrating both positive and negative effects. The assignment concludes by summarizing the dual nature of foreign investment, emphasizing the need for careful consideration of its impacts on recipient countries, and providing a comprehensive overview of its economic implications.

Running head: ECONOMICS ASSIGNMENT
Economics Assignment
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Introduction
Foreign investment is the investment of goods and services from one country to another.
It consists of investment in capital flow that deals in granting exclusive ownership in the assets
of domestic companies. Foreign investment denotes that the revenue and profits of domestic
companies are more or less dependent on the level of investment made by the foreign companies
by providing capital and other advanced technology. Foreign investment has acted as a catalyst
for bringing out the economic growth in countries in the near future because investment implies
the output supply of firms. All the firms try to improve their quality and quantity of the product
for the enhancement of diversification of commodities. Thus, foreign investment plays an
important role for the growth of businesses and management team.
However, foreign investment may create negative impacts on the domestic economy.
When a foreign company opens its franchise in domestic economy, it takes away its profit to the
foreign companies which is a loss for domestic companies and countries (Buettner et al. 2018).
Therefore, foreign investment has both positive and negative impact on the recipient country.
The aim of this paper is to bring about the advantages and disadvantages of foreign investment
on the recipient country.
Discussion
A trend found in multinational firms to gather the maximized profit is by the net foreign
investment from various countries. Domestic firms who extend their businesses in foreign
countries has seen significant growth. This is because foreign investment not only improves the
quality of the business, it also creates a strong competition among firms leading to an increase in
aggregate demand of the product.

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Types of foreign investment
The inflow and outflow of capital flow, falls under two types- foreign direct investment
(FDI) and foreign portfolio investment (FPI). Foreign investment is known as the investment
made by a firm in domestic economy to open and control ownership in other countries. The
foreign company has a direct control over the company operating in domestic economy.
Whereas, foreign portfolio investment is the investment of stocks, bonds and financial
assets in foreign country. It involves money deposited by foreigners in foreign bank account or
buy stocks, shares, corporate bonds and government bonds in foreign market by the non-
residents. The foreign investor does not have any direct ownership of the financial asset and
depending on the volatility of market assets are relatively liquid and less risky. The amount of
foreign portfolio investment made by investors is measured in country’s capital account in the
balance of payments by the inflow and outflow of money within a specific time period. Investors
are benefitted from the diversification of stocks and understanding the share markets of the
invested company.
Advantages of foreign investment
Foreign investment creates great opportunities to improve the market conditions of the
respective economy. Developed countries can grow its market capitalization power and benefit
from a rise in revenue and profits. The developing countries get ample scope for development
and creation of new opportunities to stimulate economic growth (Lee 2013). Developed
countries are able to get huge quantity of valuable inputs from the developing countries at a
cheap rate. Industries benefit from the lower production cost and higher supply of output at a low

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price which creates demand for the good. New jobs are created both in the developed and
developing country and recipient country gets an added advantage from the investment.
Most of the countries have trade barriers to restrict the entry of foreign goods, the most
common among them being the import tariff (Petras, James and Henry 2016). Businesses have
to fight against these trade barriers and keep flexible prices for consumers to buy the good.
Foreign investment help firms to understand about the flexible price to be preferred and gives the
recipient country to stimulate competition by maintaining a stable price. Import tariffs are
removed or limited because the recipient firms will run in losses otherwise. New resources enter
in the recipient economy that leads to the growth of communities. It enhances the relationship
among the donor and recipient country.
In the developing and under-developed economies, the work is limited to basic labour
and agricultural activity (Antanavičienė 2014). With new technologies, the workers are able to
do the work at a faster rate and the quality of workers advances. The efficiency and productivity
per person increases as a result of more information, development and education on new tools.
More skilled labours have a strong base to implement and suggest methods for further
development of the organisation. Recipient countries can analyse the trend of business outcomes
due to foreign investment. There is improvement in working conditions, techniques, physical
capital, land, better practices as followed by creation of new idea from overseas.
Government has placed tax incentive on foreign direct investment which does not
threaten the budget of the investors and makes availability of more money for foreign businesses.
These policies raise the efficiency per capita output as resources are directly sourced for drawing
inputs instead of giving it to government. The gap between revenue and profits go down
adversely (Nayak, Dinka, and Rahul 2014).

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Disadvantages of foreign investment
When foreign markets flourish, more employees are needed. Wages of the workers are
kept at an increased level. In some cases, workers shift from the domestic economy to foreign
country for better opportunities. This is a loss for the recipient country as efficient workers get
shifted to other countries (Blonigen, Bruce and Jeremy 2014). Companies are required to make at
least 10 percent investment on recipient countries in order to get substantial returns. Foreign
companies extract most of the surplus to their own country. A lot of people get employed due to
an increasing demand arising from foreign investment.
An outflow income is reflected in recipient country’s GDP (Gross Domestic Product) to
donor country. Foreign investment lowers trade barriers and limits the tariff on imports. Foreign
companies produce goods in the domestic country using quality resources from the domestic
economy which has a high demand on the domestic market. Foreign companies take away the
economic profits making a loss for the domestic economy. This leads to a transformation in the
interest rates and recipient country has to struggle with changing exchange rates.
The business environment is continuously fluctuating and there are political instability on
every economy because each country has a different set-up (Almfraji, Mohammad and
Mahmoud Khalid 2014). A domestic economy with strong political power might influence the
business outcomes by taking away the profits or charge money for regulation of the business.
Domestic companies who does not get the benefit of foreign investment are worse-off as demand
for their products goes down in the market. They are exploited by foreign companies.
Effects of foreign investment on Australia

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In order to understand how the level of foreign investment changes the growth of
business and country, real data of GDP and investment has been considered (Newman 2015).
Below given is the graph historical data of foreign investment made to Australia. To establish the
relation of foreign investment with the economic well-being, the trend in GDP has been shown.
The two graphs are interpreted to understand the effects, whether is advantageous or dis-
advantageous.
Figure1: The level of foreign investment made in Australia from other countries
Source: (Blomstrom 2014)
The table gives the data for the amount of foreign investment made by other countries on
Australia for a specific decade (2008-2018). The graph shows a rising trend of foreign
investment except in in or two places. In 2011, there has been a massive rise in foreign
investment of Australia near about 2.5 percent. It started rising at an increased rate until 2015
when the rate fell down heavily to 37610 units from 64905 units (Blomstrom 2014). Again, in
2016 the level increased to about 3 percent due to high demand for Australian goods and

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investors found it profitable it invest in such market. The highest has been in 2018 which has
negatively impacted the economy.
Figure2: Trend of GDP in Australia in the past ten years
Source: Sornarajah 2017
The GDP of Australia has mostly fluctuated in the period 2015 to 2018. When the rate of
foreign investment increased in 2010, the GDP went up showing a positive relationship of GDP
and foreign investment. The national income decreased hugely giving a negative value on the
accounts in 2011. The foreign investment has worsened the income level by driving resources
out of the country showing the disadvantages of foreign investment. Businesses did not gather
profits from multiple direct investment (Sornarajah 2017). The stock market was badly effected
due to portfolio investment due to changes in the stock market for prolonged period. The results
were mostly positive in the next three years until in 2018 where highest foreign investments were

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made with sharpest fall in revenues. This was because of the great economic crisis which
lowered the return from huge investment.
Conclusion
Foreign investment is seen as a beneficial tool to raise the profit margin of various
industries. It is of two types, depending on which businesses earn huge deal of profits. Foreign
investment boosts the conditions of physical and human resources. Firms become successful due
to human expertise. Foreign investment leads to exchange of adequate technology to recipient
economy. Firms earn super normal profit due to foreign investment.
The profits earned by the firms are reinvested for raising the area of expertise and
improving the working conditions of the workers. However, the impacts might be negative as
reflected in the fall of GDP in national income accounts due to foreign investment on recipient
countries. Donor companies extract huge amount of surplus from recipient companies, affecting
the economic growth of the recipients negatively. Thus, it is to be concluded that foreign
investment has both positive and negative impacts.

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Reference List
Almfraji, Mohammad Amin, and Mahmoud Khalid Almsafir. "Foreign direct investment and
economic growth literature review from 1994 to 2012." Procedia-Social and Behavioral
Sciences 129 (2014): 206-213.
Antanavičienė, Jūratė. "Foreign direct investment: driving factors and outcomes for secure and
sustainable development." Journal of Security and Sustainability Issues 3 (2014): 55-67.
Blomstrom, Magnus. Foreign Investment and Spillovers (Routledge Revivals). Routledge, 2014.
Blonigen, Bruce A., and Jeremy Piger. "Determinants of foreign direct investment." Canadian
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Brink, Charlotte H. Measuring political risk: risks to foreign investment. Routledge, 2017.
Buettner, Thiess, Michael Overesch, and Georg Wamser. "Anti profit-shifting rules and foreign
direct investment." International Tax and Public Finance 25, no. 3 (2018): 553-580.
Lee, Jung Wan. "The contribution of foreign direct investment to clean energy use, carbon
emissions and economic growth." Energy Policy 55 (2013): 483-489.
Nayak, Dinkar, and Rahul N. Choudhury. A selective review of foreign direct investment
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Newman, Carol, John Rand, Theodore Talbot, and Finn Tarp. "Technology transfers, foreign
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Petras, James, and Henry Veltmeyer. Multinationals on Trial: Foreign Investment Matters.
Routledge, 2016.

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Sornarajah, Muthucumaraswamy. The international law on foreign investment. Cambridge
University Press, 2017.