Foreign Direct Investment (FDI) has been central to the UKs economic strategy for a number of years now. Some of this has been attracted by the opportunity to exploit the UK as a tariff-free bridgehead to EU markets, and some of it has been attracted by the UK governments inducements and investment in infrastructure – a big part of which comes from EU-based companies.
FDI accounts for 28% of the UKs output (ONS, 2013)
This becomes less attractive due to the loss of tariff-free trade with the EU (i.e. a reduction in insiderisation) and a decision to repatriate among EU companies – roughly a 50:50 split between EU based owners and non EU-based owners (ONS, 2013)
The Government tries to stem this loss through lower corporation tax rates to encourage more FDI (which is already happening – Osborne lowered Corporation Tax just after the referendum)
If FDI were to be reduced (by, say, 10%), then GDP would fall (by, say, 2.8%)
According to Okuns law this would increase unemployment (by, say, 1.4%), which would then become more severe through a negative Multiplier Effect. I.e. unemployment caused by loss of FDI (approx 300,000 given that FDI accounts for 3m workers in the UK (Driffield et al, 2013)) and from the impact on supporting industries (unquantifiable) would result in a lack of buying power of displaced workers from both of these, which would then affect others in the UK economy and thus multiply the impact (unquantifiable) – unless, of course, Okuns law includes this
The Government would then have less money (in the order of 2%) because of reduced income tax and corporation tax receipts
The Government would then have to reduce its spending on social security payments and investing in the countrys infrastructure and economic development
Unemployment would rise
The unemployed would not be supported as well as previously by government hand outs as it has less tax income
The country would stagnate through lack of investment and would go backwards in the world in terms of competitiveness and the prosperity of its citizens
Could you please progress this idea further?
Please support and justify your answer.
You should consider the question from the following perspectives:
Comparative and competitive advantage
International institutions and world trade
Barriers to trade and protectionist policies
By the end of the discussion, you should:
Understand the concept of free trade and how this manifests itself in the world today
Appreciate the influence that international institutions have on international business
Understand the practical limitations of classical trade theories
The learning outcomes for this discussion are:
Critically evaluate the motives for, and barriers to, internationalization.
Demonstrate understanding of current levels and trends of global trade and business.
Guidelines for discussion responses:
Your initial posting must respond to the question above in full and be at least 200 – 300 words long
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