Question

Why would foreign governments provide MNCs with incentives to undertake DFI there?

Answer 1

Government provide siginificant amount of Incentives to the MNCs to undertake direct foreign Investment (DFI) in a country. The best example is the incentives provided by the developing economies to MNCs like Google , APPLE, AMAZON to set up their manufacturing offices . Economies like Hongkong, China, South korea did provide a lot of incentive to many companies in the early years of their growth and some of these economies are very big now like China, competing with the world's largest economy USA. There are many reasons why government provide incentives to MNC:

• Employment opportunity : The major issue most of the developing economies face are the issue of unemployment. When MNC invest in any country, they do create a large number of opportunities of employment for people in the vicinity.
• Technological Improvement: Technologically, MNC's are far more advanced than a local company. They do bring technological innovaton to the country they Invest in.
• Economies of scale : MNC's operate on a large scale and the production volume is very high. When large quantities of goods are produced, the cost of production goes down.
• Standard of living of people: By providing employment opportunities to a large number of people, they do certainly enhance the standard of living of people around.
• Infrastructure Development :Though the Infrastructure development is mostly done by the government but they do act as an enabler to create the Infrastructure so that these companies can do their operation.
• DFI are better FII: Direct foreign Investment is always better than foreign Institutional Investor, because the direct foreign Investment creates the opportunity for econmic growth but foreign institutional Investor can cause significant volatility in the stock market causing currency fluctuation.