FDI

Question 1

State + explain the macro effects of FDI.

Answer 1

• Higher Growth: lower unemployment, higher incomes, poverty alleviation, better living standards. Comes from increased AD / LRAS.
• Inflation: if AD shifts right in SR - demand-pull inflation concerns.
• Balance of Payments Improvements: FDI is a key component of financial account - repatriation of profit + impact on CA.
• Technology Diffusion + LRAS: foreign firms coming in + bringing tech with them + spreading it within country they’re operating in - shifting LRAS.
• Government Finances: in theory, foreign firms coming in making huge profits - benefits gov through corporation tax revenue.

Question 2

State + explain the micro effects of FDI.

Answer 2

• Environmental Market Failures: NE of resource depletion, air pollution, etc.
• Welfare of Workers: foreign firms may be exploiting workers with poor conditions, not giving maternity / paternity leave, firing quickly, bringing their own workers - harming domestic workers,paying domestic workers very low W.
• Dynamic Efficiency: lower C, higher productivity, potential re-investment in green production - sustainable production.
• Competition Distortion / Addition: foreign firms may come in + destroy existing firms in developing country - however foreign firms may come in + add to competition - provide more competitive outcomes + static efficiency benefits.