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(Get Answer) – Wmart Read The Following Article

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Business

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Essay

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Read the following article:

https://www.theatlantic.com/magazine/archive/2011/…

***Answer the following questions.***

FDI can have costs and benefits for host countries. Discuss thesebenefits for china with the respect to the Walmart’s recent investmentsand strategic partnerships with local firms, as detailed in the articleprovided. Which of these benefits, in your view, are the most importantfrom the standpoint of China’s long-term economic development? Be sureto relate your analysis to the supporting material below.

{Supporting Material:}

HOST-COUNTRY BENEFITS

The main benefits of inward FDI for a host country arise fromresource-transfer effects, employment effects, balance-of-paymentseffects, and effects on competition and economic growth.
Resource-Transfer Effects

Foreign direct investment can make a positive contribution to a hosteconomy by supplying capital, technology, and management resources thatwould otherwise not be available and thus boost that country’s economicgrowth rate.
With regard to capital, many MNEs, by virtue of their large size andfinancial strength, have access to financial resources not available tohost-country firms. These funds may be available from internal companysources, or, because of their reputation, large MNEs may find it easierto borrow money from capital markets than host-country firms would.
As for technology, you will recall from Chapter 3 that technology canstimulate economic development and industrialization. Technology cantake two forms, both of which are valuable. Technology can beincorporated in a production process (e.g., the technology fordiscovering, extracting, and refining oil), or it can be incorporated ina product (e.g., personal computers). However, many countries lack theresearch and development resources and skills required to develop theirown indigenous product and process technology. This is particularly truein less developed nations. Such countries must rely on advancedindustrialized nations for much of the technology required to stimulateeconomic growth, and FDI can provide it.
Research supports the view that multinational firms often transfersignificant technology when they invest in a foreign country. Forexample, a study of FDI in Sweden found that foreign firms increasedboth the labor and total factor productivity of Swedish firms that theyacquired, suggesting that significant technology transfers had occurred(technology typically boosts productivity). Also, a study of FDI by theOrganisation for Economic Co-operation and Development (OECD) found thatforeign investors invested significant amounts of capital in R&D inthe countries in which they had invested, suggesting that not only werethey transferring technology to those countries but they may also havebeen upgrading existing technology or creating new technology in thosecountries.

Foreign management skills acquired through FDI may also produceimportant benefits for the host country. Foreign managers trained in thelatest management techniques can often help improve the efficiency ofoperations in the host country, whether those operations are acquired orgreenfield developments. Beneficial spin-off effects may also arisewhen local personnel who are trained to occupy managerial, financial,and technical posts in the subsidiary of a foreign MNE leave the firmand help establish indigenous firms. Similar benefits may arise if thesuperior management skills of a foreign MNE stimulate local suppliers,distributors, and competitors to improve their own management skills.

Employment Effects

Another beneficial employment effect claimed for FDI is that it bringsjobs to a host country that would otherwise not be created there. Theeffects of FDI on employment are both direct and indirect. Directeffects arise when a foreign MNE employs a number of host-countrycitizens. Indirect effects arise when jobs are created in localsuppliers as a result of the investment and when jobs are createdbecause of increased local spending by employees of the MNE. Theindirect employment effects are often as large as, if not larger than,the direct effects. For example, when Toyota decided to open a new autoplant in France, estimates suggested the plant would create 2,000 directjobs and perhaps another 2,000 jobs in support industries.
Cynics argue that not all the “new jobs” created by FDI represent netadditions in employment. In the case of FDI by Japanese auto companiesin the United States, some argue that the jobs created by thisinvestment have been more than offset by the jobs lost in U.S.-ownedauto companies, which have lost market share to their Japanesecompetitors. As a consequence of such substitution effects, the netnumber of new jobs created by FDI may not be as great as initiallyclaimed by an MNE. The issue of the likely net gain in employment may bea major negotiating point between an MNE wishing to undertake FDI andthe host government.

When FDI takes the form of an acquisition of an established enterprisein the host economy as opposed to a greenfield investment, the immediateeffect may be to reduce employment as the multinational tries torestructure the operations of the acquired unit to improve its operatingefficiency. However, even in such cases, research suggests that oncethe initial period of restructuring is over, enterprises acquired byforeign firms tend to increase their employment base at a faster ratethan domestic rivals. An OECD study found that foreign firms created newjobs at a faster rate than their domestic counterparts.
Balance-of-Payments Effects

FDI’s effect on a country’s balance-of-payments accounts is an importantpolicy issue for most host governments. A country’s balance-of-paymentsaccounts track both its payments to and its receipts from othercountries. Governments normally are concerned when their country isrunning a deficit on the current account of their balance of payments.The current account tracks the export and import of goods and services. Acurrent account deficit, or trade deficit as it is often called, ariseswhen a country is importing more goods and services than it isexporting. Governments typically prefer to see a current account surplusrather than a deficit. The only way in which a current account deficitcan be supported in the long run is by selling off assets to foreigners(for a detailed explanation of why this is the case, see the appendix toChapter 6). For example, the persistent U.S. current account deficitsince the 1980s has been financed by a steady sale of U.S. assets(stocks, bonds, real estate, and whole corporations) to foreigners.Because national governments invariably dislike seeing the assets oftheir country fall into foreign hands, they prefer their nation to run acurrent account surplus. There are two ways in which FDI can help acountry achieve this goal.

First, if the FDI is a substitute for imports of goods or services, theeffect can be to improve the current account of the host country’sbalance of payments. Much of the FDI by Japanese automobile companies inthe United States and Europe, for example, can be seen as substitutingfor imports from Japan. Thus, the current account of the U.S. balance ofpayments has improved somewhat because many Japanese companies are nowsupplying the U.S. market from production facilities in the UnitedStates, as opposed to facilities in Japan. Insofar as this has reducedthe need to finance a current account deficit by asset sales toforeigners, the United States has clearly benefited.

A second potential benefit arises when the MNE uses a foreign subsidiaryto export goods and services to other countries. According to a UNreport, inward FDI by foreign multinationals has been a major driver of export-led economic growth in a number of developing and developednations. For example, in China exports increased from $26 billion in1985 to $2.3 trillion in 2014. Much of this dramatic export growth wasdue to the presence of foreign multinationals that invested heavily inChina.

Effect on Competition and Economic Growth

Economic theory tells us that the efficient functioning of marketsdepends on an adequate level of competition between producers. When FDItakes the form of a greenfield investment, the result is to establish anew enterprise, increasing the number of players in a market and thusconsumer choice. In turn, this can increase the level of competition in anational market, thereby driving down prices and increasing theeconomic welfare of consumers. Increased competition tends to stimulatecapital investments by firms in plant, equipment, and R&D as theystruggle to gain an edge over their rivals. The long-term results mayinclude increased productivity growth, product and process innovations,and greater economic growth. Such beneficial effects seem to haveoccurred in the South Korean retail sector following the liberalizationof FDI regulations in 1996. FDI by large Western discountstores—including Walmart, Costco, Carrefour, and Tesco—seems to haveencouraged indigenous discounters such as E-Mart to improve theefficiency of their own operations. The results have included morecompetition and lower prices, which benefit South Korean consumers. In asimilar vein, the Indian government has been opening up that country’sretail sector to FDI, partly because it believes that inward investmentby efficient global retailers such as Walmart, Carrefour, and IKEA willprovide the competitive stimulus that is necessary to improve theefficiency of India’s fragmented retail system.
FDI’s impact on competition in domestic markets may be particularlyimportant in the case of services, such as telecommunications,retailing, and many financial services, where exporting is often not anoption because the service has to be produced where it is delivered. Forexample, under a 1997 agreement sponsored by the World TradeOrganization, 68 countries accounting for more than 90 percent of worldtelecommunications revenues pledged to start opening their markets toforeign investment and competition and to abide by common rules for faircompetition in telecommunications. Before this agreement, most of theworld’s telecommunications markets were closed to foreign competitors,and in most countries, the market was monopolized by a single carrier,which was often a state-owned enterprise. The agreement has dramaticallyincreased the level of competition in many national telecommunicationsmarkets, producing two major benefits. First, inward investment hasincreased competition and stimulated investment in the modernization oftelephone networks around the world, leading to better service. Second,the increased competition has resulted in lower prices.

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