Cost benefit analysis of fdi

1. Cost Benefit Analysis of FDI
By
Lijo M. Loyid

2. Foreign Direct Investment (FDI)
• Foreign Direct Investment is an investment in
the form of a controlling ownership (10%or
more) in a business in one country by an
Business entity based in another country.
• Businesses that make foreign direct
investments are often called multinational
corporations (MNCs)or multinational
enterprises (MNEs).

3. Greenfield & Brownfield
• A MNE may make a direct investment by
creating a new foreign enterprise, which is
called a greenfield investment, or by the
acquisition of a foreign firm, either called
an acquisition or brownfield investment.

4. Cost Benefit Analysis
• A cost-benefit analysis is a process by which business decisions
are analysed. The benefits of a given situation or business-
related action are summed, and then the costs associated with
taking that action are subtracted.
• Prior to erecting a new plant or taking on a new project,
prudent managers conduct a cost-benefit analysis as a means
of evaluating all the potential costs and revenues that may be
generated if the project is completed. The outcome of the
analysis will determine whether the project is financially
feasible or if another project should be pursued.

5. Cost and benefits of FDI can be classified as two
•Cost and Benefits of the investing MNC
•Cost and Benefits of the Host Country

6. Benefits of Host Country
• Improving the balance of payments - inward investment will
usually help a country's balance of payments situation. The
investment itself will be a direct flow of capital into the country
and the investment is also likely to result in import substitution
and export promotion. Export promotion comes due to the
multinational using their production facility as a basis for
exporting, while import substitution means that products
previously imported may now be bought domestically.
• Providing employment - FDI will usually result in employment
benefits for the host country as most employees will be locally
recruited. These benefits may be relatively greater given that
governments will usually try to attract firms to areas where
there is relatively high unemployment or a good labour supply.

7. Contd..
• Source of tax revenue - profits of multinationals will
be subject to local taxes in most cases, which will
provide a valuable source of revenue for the domestic
government.
• Technology transfer - multinationals will bring with
them technology and production methods that are
probably new to the host country and a lot can
therefore be learnt from these techniques. Workers
will be trained to use the new technology and
production techniques and domestic firms will see the
benefits of the new technology. This process is known
as technology transfer.

8. Contd..
• Building of economic and social infrastructure.
• Strengthening of the government budget.
Stimulation of national economy
• The presence of one multinational may
improve the reputation of the host country
and other large corporations may follow suite
and locate as well.

9. Costs of the Host Country
• Cultural and political interference.
• Unhealthy competition to Domestic players
• Over utilization of local resources(both natural
and human resources)
• Violation of human rights(child labor eg. the
case of NIKE in Vietnam, APPLE in China etc).
• Threat to indigenous technology.
• Threat to local products.

10. Benefits of Investing MNCs
• Access to markets: FDI can be an effective way
for you to enter into a foreign market. Some
countries may extremely limit foreign company
access to their domestic markets. Acquiring or
starting a business in the market is a means for
you to gain access.
• Access to resources: FDI is also an effective way
for you to acquire important natural resources,
such as precious metals and fossil fuels. Oil
companies, for example, often make
tremendous FDIs to develop oil fields.

11. Contd..
• Reduces cost of production: FDI is a means for
you to reduce your cost of production if the labor
market is cheaper and the regulations are less
restrictive in the target foreign market. For
example, it's a well-known fact that the shoe and
clothing industries have been able to drastically
reduce their costs of production by moving
operations to developing countries.
• Its also likely that Investors may get investment
incentives, promotion, social amenities.

12. Costs to Investing MNCs
• Risk from Political Changes.
Because political issues in other countries can
instantly change, foreign direct investment is
very risky. Plus, most of the risk factors that you
are going to experience are extremely high.
• Hindrance to Domestic Investment.
As it focuses its resources elsewhere other than
the investor’s home country, foreign direct
investment can sometimes hinder domestic
investment

13. Contd..
• Economic Non-Viability.
Considering that foreign direct investments may be
capital-intensive from the point of view of the
investor, it can sometimes be very risky or
economically non-viable.
• Expropriation.
Remember that political changes can also lead to
expropriation, which is a scenario where the
government will have control over your property
and assets.
• Investment abroad takes away employment
opportunities of the people in the Home country.

14. THANK YOU