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MGT520 - International Business - Lecture Handout 36

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FOREIGN DIRECT INVESTMENT

Employment:

There is probably no more effective pressure group than the unemployed, because no other group has the time and incentive to picket or write letters in volume to government representatives. By limiting imported goods, consumers are forced to consume more goods produced domestically. This helps boost domestic employment. However, placing restrictions on imports normally results in retaliatory tariffs by other countries. In such instances, domestic jobs related to exports may be lost. Even if import restrictions do increase domestic employment, there will still be costs to some people in the domestic society in the form of higher prices or higher taxes.

Balance of Payments:

  1. A country’s balance of payments is a national accounting system that records all payments to entities in other countries and all receipts coming into the nation.
  2. International transactions that result in payments (outflows) to entities in other nations are reductions in the balance of payments accounts and recorded with a minus (–) sign.
  3. International transactions that result in receipts (inflows) from other nations are additions to the balance of payments accounts and recorded with a plus (+) sign.

Balance of Payments:

  1. Many governments see intervention as the only way to keep their balance of payments under control.
  2. Countries get a balance-of-payments boost from initial FDI flows into their economies. Local content requirements can lower imports, providing a balance-of-payments boost. Exports generated by production resulting from FDI can help the balance-of-payments position.
  3. When companies repatriate profits, they deplete the foreign exchange reserves of their host countries; these capital outflows decrease the balance of payments. To avoid this, the host nation may prohibit or restrict the non-domestic company from removing profits.
  4. Alternatively, host countries conserve their foreign exchange reserves when international companies reinvest their earnings in local manufacturing facilities. This improves the competitiveness of local producers and boosts a host nation’s exports—improving its balance-ofpayments position.

Current Account:

The current account is a national account that records transactions involving the import and export of goods and services, income receipts on assets abroad, and income payments on foreign assets inside the country.
A current account surplus occurs when a country exports more goods and services and receives more income from abroad than it imports and pays abroad. A current account deficit occurs when a country imports more goods and services and pays more abroad than it exports and receives from abroad.

Capital Account:

The capital account is a national account that records transactions involving the purchase or sale of assets. These assets include financial assets such as stocks and bonds and physical assets such as investments in plants and equipment (e.g., If a U.S. firm invests in a company on Mexico’s stock market, the transaction shows up on the capital accounts as an outflow from the U.S. and an inflow to Mexico).

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