Political Ideology and FDIThe Radical ViewThe Radical ViewThe Free Market ViewPragmatic NationalismSummary of Political Ideology The Benefits of FDI to Host CountriesResource-Transfer EffectsEmployment EffectsBalance-of-Payments EffectsUS Balance of Payment Accounts for 2004Balance-of-Payments EffectsEffect on Competition and Economic GrowthCosts of FDI to Host CountriesBenefits of FDI to the Home CountryCosts of FDI to the Home CountryHome Country Policies and FDIHost Country Policies and FDIThe Nature of NegotiationThe Negotiation ProcessNegotiation and Bargaining PowerBargaining PowerLooking Ahead to Chapter 9Chapter EightThe Political Economy of Foreign Direct Investment8 - 3McGraw-Hill/IrwinInternational Business, 6/e© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.Political Ideology and FDIRadicalViewPragmaticNationalismFreeMarket8 - 4McGraw-Hill/IrwinInternational Business, 6/e© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.The Radical View• Marxist view: MNE’s exploit less-developed host countries- Extract profits- Give nothing of value in exchange- Instrument of domination, not development- Keep less-developed countries relatively backward and dependent on capitalist nations for investment, jobs, and technology8 - 5McGraw-Hill/IrwinInternational Business, 6/e© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.The Radical View• By the end of the 1980s radical view was in retreat- Collapse of communism - Bad economic performance of countries that embraced the radical view- Strong economic performance of countries who embraced capitalism rather than the radical view8 - 6McGraw-Hill/IrwinInternational Business, 6/e© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.The Free Market View• Nations specialize in goods and services that they can produce most efficiently• Resource transfers benefit and strengthen the host country• Positive changes in laws and growth of bilateral agreements attest to strength of free market view• All countries impose some restrictions on FDI8 - 7McGraw-Hill/IrwinInternational Business, 6/e© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.Pragmatic Nationalism• FDI has benefits and costs• Allow FDI if benefits outweigh costs- Block FDI that harms indigenous industry- Court FDI that is in national interest• Tax breaks• Subsidies8 - 8McGraw-Hill/IrwinInternational Business, 6/e© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.Summary of Political Ideology8 - 9McGraw-Hill/IrwinInternational Business, 6/e© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.The Benefits of FDI to Host Countries• Four main benefits of FDI for a host country- Resource-transfer effect- Employment effect- Balance-of-Payments effect- Effect on competition and economic growth• In a free market view- Economists argue that the benefits of FDI so outweigh the costs associated with pragmatic nationalism that it is misguided- The best policy would be for countries to forgo all intervention in an MNE’s investment decisions8 - 10McGraw-Hill/IrwinInternational Business, 6/e© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.Resource-Transfer Effects• FDI can make a positive contribution to a host economy by supplying- Capital- Technology- Management8 - 11McGraw-Hill/IrwinInternational Business, 6/e© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.Employment Effects• Brings jobs that otherwise would not be created- Direct: Hiring host-country citizens- Indirect:• Jobs created by local suppliers• Jobs created by increased spending by employees of the multi-national enterprise8 - 12McGraw-Hill/IrwinInternational Business, 6/e© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.Balance-of-Payments Effects• Balance-of-Payments Accounts are divided into two main sections- The current account records transactions that pertain to three categories: merchandise goods, services, and investment income- The capital account records transactions that involve the purchase or sale of assets• Current account deficits occur when a country imports more goods, services, and income than it exports• Current account surpluses occur when a country exports more goods, services, and income than it imports8 - 13McGraw-Hill/IrwinInternational Business, 6/e© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.US Balance of Payment Accounts for 20048 - 14McGraw-Hill/IrwinInternational Business, 6/e© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.Balance-of-Payments Effects• Host country benefits from initial capital inflow when MNC establishes business- Host country records current account debit on repatriated earnings of MNC• Host country benefits if FDI substitutes for imports of goods and services• Host country benefits when MNC uses its foreign subsidiary to export to other countries8 - 15McGraw-Hill/IrwinInternational Business, 6/e© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.Effect on Competition and Economic Growth• Greenfield investments increases the amount of competition, which can:- Drive down prices- Increase the economic welfare of consumers• Increased competition tends to stimulate capital investments• Long-term results may include- Increased productivity growth- Product and process innovations- Greater economic growth8 - 16McGraw-Hill/IrwinInternational Business, 6/e© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.Costs of FDI to Host Countries• Adverse effects on competition• Adverse effects on the balance of payments- After the initial capital inflow there is normally a subsequent outflow of earnings- Foreign subsidiaries could import a substantial number of inputs • National sovereignty and autonomy- Some host governments worry that FDI is accompanied by some loss of economic independence resulting in the host country’s economy being controlled by a foreign corporation8 - 17McGraw-Hill/IrwinInternational Business, 6/e© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.Benefits of FDI to the Home Country• Improves balance of payments for inward flow of foreign earnings• Creates a demand for exports. • Export demand can create jobs• Increased knowledge from operating in a foreign environment• Benefits the consumer through lower prices• Frees up employees and resources for higher value activities8 - 18McGraw-Hill/IrwinInternational Business, 6/e© 2007 The