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The Political Economy of Foreign Direct Investment Chapter 7


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The government of a source country for Foreign Direct Investment can encourage or restrict FDI by _______________.
Domestic Firms
Explain the Radical View to Foreign Direct Investment
They argue that it is an instrument of imperialist domination.
What were the years that the radical view existed from?
From 1945 until the 1980s
What were the three reasons that the Radical View retreated by the end of the 1980s?
*The collapse of communism in Eastern Europe
*The abysmal economic performance of those countries that embraced the Radical View
*The strong economic performance of those developing countries that embraced capitalism rather than the radical view
What is the Free Market View?
Believes Countries should specialize in the production of those goods and services that they can produce most efficiently.
Foreign Direct Investment has both benefits and costs. Can benefit a host country by bringing capital, skills, technology, and jobs, but those benefits come at a cost. Therefore, pursue policies designed to maximize the national benefits and minimize the
Pragmatic Nationalism
The three main ideological positions regarding Foreign Direct Investment
1. Radical
2. Free Market
3. Pragmatic Nationalism
What are the characteristics of the Radical Ideology on Foreign Direct Investment?
-Marxist Roots
-Views the Multinational Enterprises as an instrument of imperialist domination
What are the characteristics of the Free market Ideology on Foreign Direct Investment?
-Classical economic roots
-Views the multinational enterprise as an instrument for allocating production to most efficient locations
What are the characteristics of the Pragmatic nationalist ideology of the foreign direct investment?
-Views FDI as having both benefits and costs
What are the Government policies for each of these ideologies on Foreign Direct Investment:
Radical, Free Market, and Pragmatic Nationalism
Radical-Prohibits Foreign Direct Investment, Nationalize subsidiaries of foreign-owned multinational enterprises

Free Market-No restrictions on foreign direct investment

Pragmatic Nationalism-Restrict Foreign Direct Investment where costs outweigh benefits, Bargain for greater benefits and fewer costs, Aggressively court beneficial FDI by offering incentives
Recent years have seen a marked decline in the number of countries that adhere to a __________________
Radical Ideology
An Increasing Number of countries are gravitating toward the _____________ end of the spectrum.
Free Market
The four main benefits of Foreign Direct Investment for a host country
1. Resource-Transfer Effects
2. Employment Effects
3. Balance-of-payment effects
4. the effects on competition and economic growth.
Foreign Direct Investment can make a positive contribution to a host economy by supplying what 3 things that would otherwise not be available and thus boost that country's economic rate?
1. Capital
2. Technology
3. Management Resources
What 2 main sections are balance-of-payment accounts divided into
The current account
The capital account
Records transactions that pertain to three categoires-merchandise trade, services, and investment income.
The current account
Refers to the export or import of physical goods (e.g. autos, computers, chemicals).
Merchandise Trade
Intangible products such as banking and insurance.
Income from foreign investments and payments that have to be made to foreigners investing in a country.
Investment Income
Occurs when a country imports more goods, services, and income than it exports.
Current account deficit
Occurs when a country exports more goods, services, and income than it imports
Current account surplus
Records transactions that involve the purchase or sale of assets.
Capital Account
When a German firm purchases stock in a, the transaction enters the US balance of payments as a ________ on the capital account.
When capital flows out of the U.S., it enters the capital account as a ________.
Is financed by selling assets to other countries by a surplus on the capital account
What 3 costs of FDI Concern Host Countries?
1. Adverse effects on competition within the host nation
2. Adverse effects on the balance of payments.
3. The perceived loss of national sovereignty and autonomy
List 3 Benefits of Foreign Direct Investment to the Home Country
1. The capital account of the home country's balance of payments benefits from the inward flow of foreign earnings.

2. Employment effects

3. Learn valuable skills from exposure to foreign markets that can transfer back to home country
What 3 ways may the capital account's balance suffer when using FDI?
1. From the initial outflow required to finance the FDI.

2. The current account of the balance of payments suffers if the purpose of the foreign investment is to serve the home market from a low-cost production location.

3. The current account of the balance suffers if the FDI is a substitute for direct exports.
The most serious concerns arise when FDI is seen as a _____________________
substitute for domestic production
Refers to FDI undertaken to serve the home market.
Offshore production
What are the policies designed to encourage outward FDI?
1. Foreign Risk Insurance
2. Capital Assistance
3. Tax Incentives
4. Political pressure
What types of risks are insurable in encouraging outward FDI?
-War Losses
-Inability to transfer profits back home
-risks of nationalization

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