Analysis Of Advantages And Disadvantages Of Fdi

2279 words - 10 pages

IntroductionWith the development of economic globalization, foreign direct investment (FDI) is increasingly being recognized as an important factor in the economic development of countries. Although FDI began centuries ago, the biggest growth has occurred in recent years. This growth resulted from several factors, particularly the more receptive attitude of governments to investment inflows, the process of privatization, and the growing interdependence of the world economy.Foreign direct investment (FDI) occurs when a firm invests directly in facilities to produce and/or market a product in a foreign country (charles w.l.hill, "International business"). FDI takes on two main forms; the first ...view middle of the document...

But for products with a high value-to-weight ratio, transport costs are a minor component of total landed cost. In this case, the advantage of FDI over exporting is very limited.2. Avoidance of trade restriction. For various reasons, many countries might make it impractical in many ways for companies to reach their market potential through exportation alone. The primary form of impediment to exporting is import barrier. Many countries' governments place tariffs on imported goods and limit import through the imposition of quotas, both of which make exporting unprofitable. On the other hand, it increases the profitability of FDI. Thus, for entering countries that place tariffs but have a large growing market potential such as China, many firms choose FDI and/ or licensing to expand their foreign markets.3. Advantage of tax incentives. In some developing countries, on the one hand, they need to place tariffs on imported goods for protecting their own firms, on the other, they also strive to create a favorable and enabling climate to attract FDI, which brings capital, facilitates the transfer of technology, organizational and managerial practices and skills as well as access to international markets. Therefore, some countries offer tax incentives to attract investment. For those multinational companies located in high tax rate's nations such as UK, and US, invest in a country which exists tax incentives is a good way to reduce tax.4. Avoidance of an uncertain cost structure created by foreign exchange. When a firm adopts exporting to be a primary method for expansion of foreign market, one of the main risks it has to be faced with is mismatch of currency of firm's cash inflow and cash outflow. Cost and revenue are derived from different denominations, once the main currency in home country strengthens, income created by host country's currency might no longer cover costs. To the contrary, FDI makes sure all costs and revenue are derived from the same currency. Thus, it reduces risk arisen by foreign exchange.5. Avoidance of consumer-imposed restrictions. In some countries, there are not only trade barrier imposed by government, but also limitations imposed by consumers. Take South Korea as a example, many Korean may prefer to buy domestically produced goods even when they are more expensive, largely because of their nationalism. Another worry about foreign-made goods is that service and replacement parts will be difficult to obtain. In this situation, undertaking FDI is a better choice than exporting.6. Use of local raw materials and market testing. As we have known, different countries have different tastes and requirements to the same goods. Thus, a multinational company often must alter a product to suit local tastes and requirements. It means that local raw materials and market testing may be used. In the situation, exporting is difficult and expensive. When firms think licensing is unsafe to protect their know-how, the best way to expand...

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