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Limitations of FDI to a home country

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Essay, Pages 3 (538 words)

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Essay, Pages 3 (538 words)

Foreign direct investment is advantageous to the USA however there are also limitations of FDI to a home country. Some of the most widespread limitations consist of the loss of employment. The main reason as why production takes place in foreign countries is because the company benefits from cheap labour and material sourcing costs. Other problems comprise of repatriations. This means that problems occur when “returning foreign-earned profits or financial assets back to the company’s home country”. Buzzle, 2011) Another drawback of FDI to a home country is the competition that ascends.

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The developing significance of FDI has compelled host countries into competition. The intention of this is to escalate the amount of FDI’s, but at the same time, to condense the long-term benefits per dollar of investment. (Tearfund, 2010) The Organization for economic cooperation and development, (OECD), states that FDI bring competition in the domestic market as the competition laws and frameworks in the host country are weakly executed. OECD, 2002)

Moreover, whilst FDIs upturn and accumulate, the demand of FDI also increases and has an impact on the environmental policy of that country.

This means that the less developed countries have restricted environmental regulations which mean that there is a lack in enforcing the policies regarding FDI. (Tearfund, 2010) Another limitation of FDI is that high returns are extracted. Cost may be a significant aspect of FDI but it also one of the greatest drawbacks as direct investment is more perilous than the provision of loan capital. Therefore foreign investors expect higher returns.

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Tearfund, 2010) Furthermore, Oman, contributes by adding that FDI has become considerably vital in the balance of payments. This is due to the fact that most developing countries have immense debt repayments and a deficit in the current account. The deficit as a consequence must then be invested with capital inflows as an excess of imports over exports leads to instability. This can then put pressure on the currency of that country. However if the FDI imports more in this situation, then the FDI can exacerbate the trade situation of the host country. (OMAN, 2002)

In regards to Toyota, they are acknowledged for their assurance to low cost, high quality, and just-in-time inventory. One of Toyota’s major advantages is its strong cash position hence the reason Toyota uses its strong financial position to expand operations worldwide. In spite of this, Toyota faces challenges whereby their net profits in 2004 dropped from ? 301. 9 billion a year earlier to ? 297. 4 billion. (Jmasselli, 2004) Since Toyota is a Japanese company that reports financial information in Japanese yen, it is subject to exchange rate fluctuations.

Moreover, other problems Toyota has faced and suffered are in regards to high raw materials costs, both inside Japan and in its other operations worldwide. It is important for the company to do well in North America, because it accounts for about two-thirds of the Japanese car industry’s profits on an operating level. An additional factor that has an influence on the growth of Toyota abroad is the opening of the European Union. In 1999, the EU countries opened the doors to Asian car makers, and their market share rose from 14. 8% to 17. 4%. (JMasselli, 2004)

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Limitations of FDI to a home country. (2020, Jun 01). Retrieved from https://studymoose.com/disadvantages-of-foreign-direct-investment-essay

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