Question

Assume two nations, two products, and two factors of production labor and capital . compare the situation of FDI in the Short run and the long run regarding wages, returns to capital industry output and prices of goods

Answer 1

For our convenience let’s assume country A has a product Plastic and Country B has product Minerals.

Country B which is producing a labor and capital intensive product doesn’t have sufficient infrastructure to support the production then it won’t be able to cater to the demands of country A which has a relatively better infrastructure.

So, FDI into country B by country A will provide a capital to develop the industry infrastructure which will help the production to get completed in a timely and cost effective manner in a long run. FDI will also open grounds for competition within the industry which will lead to effective and optimal utilization of resources effectively bringing down cost of production and reducing a monopoly or oligopoly market development.

If a company  which is efficiently growing its returns on capital employed will look to further specialize itself by hiring specialists to further capitalize the opportunities which will effectively increase the incentives of labors employed.

So, in short run FDI will bring healthy competition as wage increase in country B. However, in long term the true benefits of FDI those are mature industry, diverse market, stable and improving wages will be witnessed.