FDI & MNCs
The meaning of foreign source of finance
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Funds that flow into a country from abroad, other than payments received for exports of goods and services
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Inward flows are viewed as credit in the BOP since they involve inflows of foreign exchange and work to balance out debuts
Function of foreign source of finance
1. Helping countries acquire foreign exchange
2. Adding to insufficient domestic savings
3. Adding to technical skills, management skills and technology
Main sources of foreign finance in developing countries
Foreign Direct Investment (FDI) & Multinational Corporations (MNCs)
FDI - investment by firms based in one country in productive activities in another country
MNCs - corporations that do FDI
Reasons for MNC to expand into economically less developed countries
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Increases sales and revenues
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Bypass trade barriers
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Lower costs of production
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Use locally produced raw material
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Further their activities in natural resource extraction
Characteristic of developing countries that attracts MNCs
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Stable political environment
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Stable macroeconomic environment
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Institutional environment that favours FDI, such as freedom to repatriate profit, freedom to engage in foreign exchange, favourable tax rules
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Liberalised economy
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Large markets
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Well educated labour force
Advantages and disadvantages of FDI for LEDCs
