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Discuss the benefits and challenges of Foreign Direct Investment (FDI) for the Irish economy. - Leaving Cert Economics - Question b - 2018
Question b
Discuss the benefits and challenges of Foreign Direct Investment (FDI) for the Irish economy.
Worked Solution & Example Answer:Discuss the benefits and challenges of Foreign Direct Investment (FDI) for the Irish economy. - Leaving Cert Economics - Question b - 2018
Step 1
Benefits of Foreign Direct Investment (FDI)
Answer
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Creates Employment (Direct and Indirect): FDI significantly contributes to job creation in Ireland. Many global companies in sectors such as ICT, life sciences, and financial services set up operations, providing direct employment opportunities. Additionally, jobs are generated in local industries supporting these multinationals.
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Exports / Effect on Balance of Trade: The inflow of funds from FDI plays a crucial role in balancing trade. FDI enhances the export capabilities of the Irish economy, as local companies diversify their exports to include a wider range of goods and services, thereby improving the balance of trade.
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Effect on Government Revenue: Foreign Direct Investment contributes to substantial revenues through Corporation Tax. Multinational corporations (MNCs) often provide significant financial contributions, which can be used to enhance public services such as education and health.
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Economic Growth: FDI promotes growth by attracting foreign businesses, increasing production capacity, and thereby contributing to the overall economic prosperity of Ireland. This growth is pivotal as it encourages domestic firms to expand.
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Enhances Worker Productivity: Workers gain access to advanced knowledge, technology, and training through MNCs, which enhances their skills. This increased productivity is beneficial not only to the companies but also to the wider economy.
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Increases Attractiveness of Ireland as a Location: The presence of established MNCs fosters a strong business ecosystem, making Ireland a more attractive destination for future investments. This established reputation can lead to further FDI inflows.
Step 2
Challenges of Foreign Direct Investment (FDI)
Answer
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Taxation Issues: There are concerns regarding the effectiveness of tax policies for MNCs in Ireland. Some argue that the tax structure can be volatile, particularly the Corporation Tax, which affects the amount of revenue generated from these entities.
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Effects on Local Economy if They Re-locate: If MNCs decide to pull out or relocate their operations, it can significantly impact the local economy and employment levels. For instance, the departure of such companies can lead to job losses and hinder economic stability.
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Repatriation of Profits: MNCs often repatriate profits back to their home countries, raising concerns about the benefits remaining in the Irish economy. This practice may inhibit local investment and growth.
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Competition and Location of FDI: Other nations are emerging as attractive destinations for FDI, which poses a competitive challenge for Ireland. Uncertainties in the political landscape may also deter potential investors.
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Distribution of Benefits/linkages with Irish Firms: While FDI can be beneficial, there is a concern over whether the economic benefits are evenly distributed across the country. MNCs may dominate local markets, leaving smaller firms at a disadvantage.