International Business

Table of Contents

Abstracts 3

Introduction 4

Government intervention on beneficial FDI inflow 6

Government intervention to prevent negative impact of FDI 10

Conclusion 13

Reference 14

Abstracts

The essay outlines the importance of the government intervention on Foreign Direct Investment (FDI) inflow. FDI inflow is considered to bring benefit to the host countries regarding to the advanced technology transfer, know how demonstration effect as well as new ideas and entrepreneurial skills attached with FDI are obtained through labour training and skill acquisitions or the introduction of alternative management systems and organization arrangements. However, without government intervention or imposing regulation on every single aspect of the trend, FDI will have negative impact on domestic markets such as losing profit in local industry due to higher technology and cost effective production line, or negative impact on trade balance of the host country. Government intervention is also playing an important role in preventing MNE(s) from exploiting natural resources, polluting environment and illegally using children labour.

Introduction

Beginning in the mid-1980s, world foreign direct investment (FDI) flows increased rapidly with a growing number of multinational enterprises (MNEs) as the new trend to increase international economic activities. Both industrialized and developing countries are becoming more receptive to FDI flows such that a majority of FDI policy changes in these countries are in the direction of more liberalization of FDI inflows (United Nations, 1992). Although FDI flows and stocks are concentrated mostly in industrialized countries (Lucas, 1990), developing countries, especially in the Asia-Pacific region, recently showed a noticeable increase in their absorption of world FDI flows (United Nations, 1992, 1995). Thus, FDI in the recent period has become the principal source for external capital for many developing countries, particularly in Asia.

New technologies may become available in developing countries through various sources such as domestic R&D activities, imports of capital goods and equipment, buying technologies through licensing or franchising or FDI. New ideas and entrepreneurial skills attached with FDI are obtained through labor training and skill acquisitions or the introduction of alternative management systems and organization arrangements. FDI may also promote technological upgrading through demonstration effect, even without explicitly significant capital accumulation. Even though, FDI has good impact on host countries but the more open to FDI the more MNEs will hurt the domestic companies as they are not competitive in term of technology so gradually local companies will be losing their market and affect the domestic economy.

In some situations, MNCs exploit natural resources, cause environmental pollution, employ child labor, or take advantage of the looser regulations of the host countries (to bypass the stringent regulations and costly requirements of parent countries) (Kwok & Tadesse, 2006).

This essay will focus on how the host countries government controls FDI inflow, their intervention role in preventing negative impacts of FDI through examples of various countries all over the world to outline the need and the major role of government intervention toward FDI even when they are beneficial or negatively influence domestic industries.

Government intervention on beneficial FDI inflow

The inflow of FDI may increase the availability of stock in the physical capital market and thus the economic growth of the host country. In this case, the increase of physical capital through FDI might have only transitory impacts on the economic growth of the host country. Indirectly, FDI can also be growth enhancing by encouraging the adoption of new varieties and equipment, and also of foreign technologies in the production function in the host economy (Kim and Seo, 2003).

Despite the fact that the inflow of FDI brings benefit to the host country but it needs to be controlled by the host government. They can either impose the restrictions on the amount of the FDI, or impose higher tax on the production to protect the domestic company. New technologies embodied in FDI might accelerate technological obsolescence of traditional technologies used in developing countries and thus crowd out domestic