What are the costs of FDI to the host country? How do governments influence FDI?

A

There is the ‘headquarter effect’ when a foreign firm acquires a local firm. For instance, an international firm may decide to shut down critical aspects of the local firm due to centralization. This strategy could reduce the number of high-skill jobs and chances of growth in the host country. Moreover, it can drive indigenous organizations out of the market due to competition.

Others have argued that FDI may compromise the sovereignty and national security of the host country. It is not desirable for a host country to allow foreign firms to control critical firms. For instance, the US would not allow China to buy its significant technology firms, which are responsible for national security. There are possibilities that the Chinese firm can leak vital information to China government due to political pressure.

The foreign firm may also hold the host country as a ‘hostage.’ For example, China has threatened the US because of its large investment in the Federal Reserve.

The home country encourages FDI in critical sectors of the host country. For instance, China concentrates only on investment in the oil industry in the host countries. It provides financing, low taxes, and even financing to its firms operating in Africa. For national security purposes, the home country may restrict FDI.

On the other hand, the host country encourages FDI to stimulate economic growth, competition, and job creations. However, the host country also tends to restrict the ownership structure. For instance, in the United Arab Emirates, Emiratis must own at least 51% of a foreign firm.

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Academic.Tips. 2020. "What are the costs of FDI to the host country? How do governments influence FDI?" May 15, 2020. https://academic.tips/question/what-are-the-costs-of-fdi-to-the-host-country/.

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Academic.Tips. "What are the costs of FDI to the host country? How do governments influence FDI?" May 15, 2020. https://academic.tips/question/what-are-the-costs-of-fdi-to-the-host-country/.

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