Question

There has been an increase in the investment flows from China and other emerging markets into the US. We also have seen an increase in FDI outflow from US to other markets.

1. What do you think about FDI inflows and outflows to/from the US? How do these flows affect US economy?
2. Should the government allow Chinese FDI into the US? Provide two arguments to support your answer.

Note: You can think the effects of FDI flows on the US in terms of Jobs, Income, Balance of payments, diversity, innovation etc.

Answer 1

Ans: FDI inflows refers to the investment made by the non- domestic residents in the business operations of the domestic countries. wheras FDI outflows refer to the investment made by the domestic residents in the business operations of foreign countries.

FDI inflows in US in 2019 amounted to USD 246 billion wheras FDI outflows of about 125 billion second largest in the world. FDI inflows and outflows affect the US economy in many areas these flows have a great impact on the economy of US; US has been a perfect destination for FDI inflows as the currency dollar is the main centre of world currency market. and due to the innovative and the most productive workforce in the world; most of the tech firms are located in US.

FDI inflows and outflows affect the US economy in the following ways:

1. Due to the investment by the foreign firms in the US, the US high skilled workers receive higher wages and their disposable income rises; the living standards rise and there are varierty of goods available to the consumers.
2. Due to more productive and innovative techiquesthere is spillover benefits available to domestic firms making these local firms more productive as well.
3. These flows are crucial as these are a major source of foreign exchange because these flows the balance is maintained in the forex market; these transactions are a major part of capital account of BoP
4. These flows help to gain the benefits of economies of scale to thefirms as to maintain steady global supply chain. Yes there can be negative impacts also due to these flows socio- economic inequalities rise because of the low wages of unskilled workers.

Govt should allow Chinese FDI into the US because of the following reasons:

Chinese markets have new innovative production technology in the world and the first class manufacturing process not only that they have low cost of production and diversity also which leads to the spillover effects to the domestic firms of US

FDI inflows from China in terms of electronic companies and IT sector create a number of jobs for the USA domestic market and they also offer lucrative income becuse in order to hire the productive workforce the incentives must be high; so high incomes are being provided; so the FDI inflows help to raise jobs and income levels of the people.

Because of FDI inflows the transactions have a positive impact on the BoP account and there is Bop Surplus.