To understand the potential economic and political impacts of FDI, we need to remember the motivations and format of FDI.
 

MOTIVATIONS  FOR  FDI
Recall the motivation for FDI:  to exploit a corporate asset in a foreign setting by controlling a production operation in the foreign country;  the reasons to locate the operation in the foreign country include:

logistical:
· the resource is in the foreign country, and needs to be processed there (U.S. oil or agri-business development in foreign countries);  or
· the market is in the foreign country, and needs to be served with local production (investment in foreign banks or department stores);  or
· the key human and infrastructural resources are in the foreign setting (“offshore” FDI for export from low-wage LDCs;  Sony’s investment in Hollywood’s entertainment industry)

overcoming barriers:
· exporting goods, or moving professionals to the foreign country to provide the service, are prohibited or made difficult by the foreign country (U.S. corporations’ establishment of small Canadian subsidiaries in the 1950s, ‘60s, and ‘70s, despite the proximity of the Canadian market centers to those of the U.S.)

strategic:
· neutralizing possible local competition in the foreign market, on its own turf, before it has a chance to grow strong (Boeing production in Asian markets);
· following a close international competitor into a particular foreign market or resource location (business-service and financial MNCs)
 

ECONOMIC  IMPACTS  OF  FDI

Balance-of-payments effects
We can use the entries of the balance of trade table to note the context- and time-dependent economic impacts of FDI.  Let’s take an example of a market-oriented FDI into the U.S., using the rows of the table of international transactions:
 

1	Exports of goods, services, income
3	Goods	limited effect
4	Services (travel, royalties, private services)	limited effect
12	Income receipts on U.S. assets abroad	n/a
18	Imports of goods, services, and income
20	Goods	reduced because of new U.S. production;  increased because of imported components
21	Services (travel, royalties, priv. services)	increased royalties, licensing, and management services from the parent company
29	Income payments on foreign assets in U.S.	low at first;  increasing over time
35	Unilateral transfers, net	n/a
40	U.S. assets abroad, net change	n/a
55	Foreign assets in the U.S., net change	increase in the early years;  depreciated in later years
70	Statistical discrepancy	n/a
71	Balance on goods = (2) + (16)	some increase
72	Balance on services = (3) + (17)	some decrease
73	Balance on goods and services + (64) + (65)
76	Balance on current account = (1) + (15) + (29)	likely increase in early years

Growth and developmental effects

On the home country:

• growth of the returns to owners of the MNC;
• increased employment of managerial and business-service labor;
• potential reduction in employment of direct labor and resources (including nonrenewable resources)

• additional technology, management, and marketing resources that might not enter the country through “arm’s length” arrangements (see World Bank paper investigating the technology impact of FDI);
• increased employment of direct labor and resources (including nonrenewable resources);
• potential displacement of managerial resources

What are the political interests of the MNC?
The interests of MNCs are in their medium- to long-term ability to gain returns on their investments (physical and intellectual property).  When these interests are threatened by actions of a host-country government (e.g., through discriminatory regulation or through expropriation) or of a home-country government (e.g., through trade restrictions), the MNC uses any number of means to prevent the governmental action.

Do MNCs’ interests coincide with those of their home countries?
To the extent that an MNC’s ownership is largely in its home country, the interests of the MNC may coincide with the interests of the economic (and political) elites of the home country.  To the extent that the MNC’s top management is largely from and in its home country, its cultural affiliation and preferences will also be that of the home country.

Home-country governments occasionally attempt to regulate the foreign operations of companies based in their territories.  This is called extraterritoriality:  the term reflects the usual expectation that sovereign governments are sovereign over some defined territory, but not beyond.  The norm toward which most international agreements strive is national treatment, under which professionals and business operations are governed, in non-discriminatory fashion, by the laws of the country in which they are operating.