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International Business

notes (c) Before others move in IBM felt it needed to move quickly to establish its own
low-cost production facilities.
(d) (a) and (b)
(e) (a), (b) and (c)

7.3 reasons for fDi

There are strong reasons why MNCs are welcomed to invest in foreign countries. Some of the
prominent reasons are explained below:
1. To fill the gap between available domestic resources and the desired level of resources:
Traditionally, foreign investment is seen as a way of filling the gap between the domestically
available supplies of savings, foreign exchange, government revenue and human capital
skills and the desired level of these resources necessary to achieve growth and development
targets. If domestic savings are inadequate to generate enough investments, foreign capital
is expected to fill the gap between targeted or desired investment and locally mobilized
savings.
Often, the foreign exchange earnings generated from exports and foreign aid fall short of
the targeted requirements. This is typically called trade deficit or gap. An inflow of FDI can
not only alleviate part or all of the deficit on the balance of payments current account, but
can also function to remove that deficit over time, if the MNCs can generate a net positive
inflow of export earnings. There can be a gap between targeted government tax revenues
and locally raised taxes. By taxing the MNC’s profits and participating financially in their
local operations, governments of developing countries are expected to be able to mobilize
public financial resources for development projects.
2. To fill the gap in management, entrepreneurship and technology: There is also a gap in
management, entrepreneurship, technology and skill which is presumed to be partly or
wholly filled by the local operations of MNCs. Not only do multinationals provide financial
resources and factories to poor countries, but they also supply a ‘package’ of needed
resources, including managerial experience, entrepreneurial abilities, and technological
skills that can then be transferred to their local counterparts by means of training
programmes and by the process of ‘learning by doing’. In addition, MNCs educate local
managers about how to establish contacts with foreign banks, locate alternative sources
of supply, diversify market outlets and become better acquainted with international
marketing practices. Besides, MNCs bring with them, the most sophisticated technological
knowledge about production processes along with modern machinery and equipment
to the capital-starved developing countries. It is assumed that a part of this knowledge
leaks out to the broader economy when engineers and managers leave to start their, own
enterprises. Such transfers of knowledge, skills and technology are assumed to be both
desirable and productive for the recipient nations.
3. Promotion of domestic investment: Factories set up by MNCs act as a nucleus of growth.
An industrial enterprise established by a foreign company gives birth to several other
enterprises which supply inputs to the parent company. It is not as if only a few surrounding
firms are the beneficiaries; an entire industry may get boost. It is estimated that every dollar
of FDI increases domestic investment by 80 per cent of the amount of FDI.
4. Promotion of healthy competition in host countries: FDI can generate healthy competition
in the recipient countries. When FDI assumes the form of green field projects, the result is the
creation of new enterprises, adding to the number of players in the market. By implication,
this can increase the level of competition in the host country. Intense competition enhances
consumer choice, tends to bring down prices and boosts economic welfare of the consumers.
Increased competition tends to stimulate capital investments by firms in plant, equipment

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