Assess the impact of globalisation on the standard of living in low-income countries. [20]
Foreign direct investment is a type of investment from a foreign entity. It usually creates a long term relationship with the host country and the primary objective of these investments is maximise profit from collaboration with foreign firms.
Low income countries are usually characterised with low GDP per capita which leads to low living standards. Beside access to basic infrastructures are limited with low skilled workers.
Many low income countries vie for FDI as a source to improve the country economically. FDIs inject capital by building factories, bringing in machinery and transferring technologies. This improves employment opportunities as well as transfer of knowledge to the people in host countries. This creates new income streams in low- income countries. As a consequence, there will be an increase in demand for other goods and services leading to further spending and economic growth. Thus FDI increases injection into the circular flow income and through the multiplier process enables the host country to experience economic growth which empower them to improve standard of living.
The accelerator theory shows FDI involvement in low income countries has a positive impact on investment rate. This is because often these FDIs do require goods and services of local businesses. As a result, there will be new opportunities for local businesses to prosper. As firms expand, capital stock will increase, boosting economic growth and improving standard of living.
Furthermore, FDI can have a significant impact on the tax revenue of the host country. There are a couple of ways the host government increases its tax revenue from FDI. Firstly, the transfer of capital and skills improves productivity and growth. Overall individuals and other business income improves. This leads to an increase in taxable income generated by the domestic economy, thereby increasing tax revenue. Secondly, these FDIs are subjected to corporate tax regulations hence they contribute towards the tax revenue as well.
The improvement in tax revenue could initiate further spending by the government. This can improve provision of public goods for example better healthcare and education can be provided which help to decrease market failure. Overall an improved provision of public goods will decrease income inequality in the economy as the have-nots are able to access basic provisions. Hence improving standard of living.
However, there are potential negative effects of FDI as well. Often FDIs enter a host country with a large capital. With higher resources, they may dominate the market and eliminate small domestic competitors as well. This means there will be lack of competition and market dominance also can lead the locals relying on these firms for employment. This economic dependency can make the host government vulnerable to the decisions and actions of these foreign firms. At times, government policies are skewed in favour of these firms as they dominate the market. Therefore foreign dependency may not create an improved standard of living.
Furthermore, FDI may relocate to their host country due to the availability of natural resources that are needed in their production. They may extract these resources at a rapid pace, without regard to long term sustainability. This situation (negative externality) exacerbates the problem of market failure in the host country. The depletion of resources and environment degradation will not improve the standard of living in th low income country.
Finally, there is also the problem of Dutch disease. This occurs when the inflow of foreign direct investments increases demand for the host country's currency. An appreciation in the currency makes export of the country less attractive in the global market. This could lead to decline in export especially if the low income country’s exports are price elastic. Thus leading loss of economic competitiveness, which can have negative impacts on the standard of living.
In conclusion, FDI can be a powerful tool for promoting economic development and improving the standard of living in low- income countries but policy makers should carefully consider the potential costs and benefits of FDI and take measures to mitigate its potential negative impacts.
