1.3. Balance of Payments Effects
FDI’s effect on a country’s balance of payment accounts is an important policy issue for most host governments. There are three potential balance of payments consequences of FDI. First, when an MNE establishes a foreign subsidiary, the capital account of the host country benefits from the initial capital inflow. However, this is a one-time only effect. Second, if the FDI is a substitute for imports of goods or services, it can improve the current account of the host country’s balance of payment. Much of the FDI by Japanese automobile companies in the US and UK, can be seen as substitute for imports from Japan. A third potential benefit to the host country’s balance of payment arises when the MNE uses a foreign subsidiary to export goods and services to other countries. The evidence based on empirical research on the balance of payments effect of FDI.
1.3. Balance of Payments EffectsFDI’s effect on a country’s balance of payment accounts is an important policy issue for most host governments. There are three potential balance of payments consequences of FDI. First, when an MNE establishes a foreign subsidiary, the capital account of the host country benefits from the initial capital inflow. However, this is a one-time only effect. Second, if the FDI is a substitute for imports of goods or services, it can improve the current account of the host country’s balance of payment. Much of the FDI by Japanese automobile companies in the US and UK, can be seen as substitute for imports from Japan. A third potential benefit to the host country’s balance of payment arises when the MNE uses a foreign subsidiary to export goods and services to other countries. The evidence based on empirical research on the balance of payments effect of FDI.
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