Discuss the below:
1 Inward investment by a firm is also called foreign direct investment (FDI). FDI takes on two main forms, a greenfield investment and acquisitions. Greenfield investments are the establishment of new operations in a foreign country (Hill, 2013). Acquisitions are more common since the initial cost by the firm is lower mostly because factories and infrastructure do not have to be built (Hill, 2013). FDI can be beneficial for a host country since it allows money to be invested in a country that normally would have been invested elsewhere. This resource transfer is one of the main benefits enjoyed by host countries of FDI. Hill says, "FDI can make a positive contribution to a host economy by supplying capital, technology, and management resources that would otherwise not be available and thus boost that country's economic growth rate" (2013, p. 266). The benefit can be easily seen in developing countries. In those countries, the most recent technology is not available. For instance, crops are still being managed by centuries old methods. FDI allows for more modern agricultural technology to be brought into that country. Workers can gain new skills by learning and operating the new machines. Crop production will increase which will lead to an increase in sales. More sales can lead to hiring more employees at higher wages, which increases the amount of money the local population has to spend on local goods and services. Thus, the economic wheel speeds up.
Greenfield investments also serve to increase competition in the host country (Hill, 2013). Basic economics prove that with increased competition, consumer prices usually fall (Brickley, Smith, & Zimmerman, 2009). The falling prices allow for more consumers to buy products which drives greater economic growth. Lastly, greater economic growth also can lead to higher tax revenues for the host country (Razin, 2001).
As with most things in life, moderation is important. FDI should not be viewed as a cure all for economic woes. There can be some costs or drawbacks to the host country. One concern is any adverse effect on competition, especially in developing countries. A foreign company many hold an advantage in a price war with a local company with fewer resources. The foreign company has, in theory, unlimited resources from which to draw upon. Therefore, they could drive prices so low; they could force the local companies out of business. The last company standing, the foreign company, now can have a monopoly, and raise prices higher than their original cost before any FDI. This is one reason why host countries have policies in place to both allow, but also limit the amount of FDI in any one industry (Hill, 2013).
Brickley, J., Smith, C., & Zimmerman, J. (2009). Managerial economics and organizational architecture. New York: McGraw Hill/Irwin.
Hill, C. (2013). International Business: Competing in the global marketplace (9th ed.). New York, NY: Irwin/McGraw-Hill.
Razin, P. L. A. (2001). How Beneficial is Foreign Direct Investment for Developing Countries? Finance & Development, 38. Retrieved from https://www.imf.org/external/pubs/ft/fandd/2001/06/loungani.htm
2 DAVID SEIGEL
To really assess whether the inward investment from Telefonica benefits the host nation we would need to know the level of development of that nation. If the host nation is very underdeveloped investment by Telefonica may benefit the host nation. If the host nation is semi developed it would not benefit the host nation. In an underdeveloped nation investment by Telefonica would help bring resources, capital, and technology to a company that may not presently exit. It may also create employment opportunities for workers in the host nation. In a semi developed or developed country I think inward investment from a Monopolistic company would hurt that nation. Telefonica could enter the market and drive prices down to a point the competition cannot compete with, leading that company to go out of business. Then
Telefonica could raise prices in the host nation. Inward investment by Telefonica would also remove capital from the host country that may otherwise be used for development and reinvestment in that country.
References
Hill, C. (2012). International business. (9th ed.). New York,NY: McGraw-Hill/Irwin