Wednesday, June 13, 2007

How to Increase FDI in developing countries

Discuss 3 Policies to increase FDI in developing countries.

1. Improve quality of infrastructure.
This leads to lower costs for firms and therefore, encourages investment.
However, it will take a long time to have an effect. It will also cost alot of money.

2. Lower taxes for foreign firms.

This will lead to more firms wishing to invest; however, it will affect the government finances, they may have to increase other taxes. It depends on how beneficial FDI actually is, there maybe a high opportunity cost. There could be better things to subsidise. (foreign firms may repatriate the profit, so the developing country benefits little.

3. Subsidise firms to invest.

This provides a financial incentive to increase investment. However, it will be quite expensive. Also, it may attract the wrong kind of firm. The subsidy may encourage inefficiency.

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