The Significance of Inward Foreign Direct Investment - Essay Example

Other benefits of inward foreign direct investment such as labor turnover operate through regional lines. For example, when FDI was allowed in the U.S there was significant movement of scientists between local and foreign firms.

Although the domestic firms enjoy benefits of spillover from the foreign firms, the government incurs subsidy costs. In an effort to encourage foreign investment in the local market, most governments usually, offer subsidies and tax breaks to foreign firms. When the cost of subsidies increases taxation increases thus hurting the local economy. For example, in the year 1992, the maximum corporate tax in the US was 34% and 33% in the UK meaning that these governments only gained approximately 1/3 of the total gains (Maskus, 1994).
Q2
Costs and benefits of allowing FDI are likely to be affected by the level of development and growth of the country and firms. For example, the government only gives subsidies to new firms but after they become stable, such firms sustain themselves. Therefore, when firms more continue to generate more profits, increase market share and reduce risks the country’s economy becomes more stable. The benefits continue to increase while the costs decrease. Foreign firms that are underperforming offer less benefit to the domestic firms and the host governments and so the governments have to spend more to make them profitable and operational (Moran, 2005).
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