Analysis of foreign direct investment
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The multinational corporation has become one of the most controversial economic and political institutions of our time. What international investment dose to job, exports, prices, income distribution, access to aw materials, taxes, and market power is debated in host and home countries alike. To some people, multinationals threaten the international economic and political system; to others, they are engines of progress; in another, agents of exploitation. Controversy over the causes and effects of foreign investment has frustrated the development of coherent government policies. Disagreements stem from inadequate data, inappropriate theories and analytical methods, and complex interactions between the economics and politics of foreign investment.
There are several ways that unrestricted foreign direst investment could lower the national welfare of a country and thus call for optimum capital controls. Traditional economic analysis focuses on comparative rates of return on alternative investment opportunities; it thus regards the higher pretax rates on foreign investment as evidence that foreign investment promotes world welfare. From the national standpoint of the home country, however, the comparison should be made between domestic earnings and foreign earnings after the payment of foreign taxes, which represents the return on the foreign earnings be denied the foreign tax credit.
In addition, an individual firm contemplating an investment abroad may ignore the impact of its activity in the return in other foreign direct investment. When the outstanding stock is already quite large, as is the case for the United States, the reduction in income of other investors could offset the return on the new investments...