In my judgment, inward investment by Telefonica does benefit a host nation. Foreign Direct Investment takes place when a company invests its capital in new facilities in a foreign country. FDI is growing rapidly in the global market since it involves less risks compared to world trade and world output. Foreign direct investment can make a positive contribution to a host economy by supplying capital, technology, and management resources that would otherwise not be available and thus boost that country’s economic growth rate. (Hill, 2013)
Spain’s Telefonica provides a good example Foreign Direct Investment and how it has been growing in the global market. It provides an understanding of how FDI works and what are the benefits of merging with other companies in foreign countries. The political changes in the Europe and Latin America were a big advantage towards the growth of Telefonica. If Telefonica had not been deregulated, it would not have found the opportunity to expand in Latin America. The investment of Telefonica in foreign companies not only benefited the companies and the host nations but also make Telefonica one of the largest companies in the world.
For host countries, inward FDI has the potential for job creation and employment, which is often followed by higher wages.
This is especially applicable for developing economies. During the 1990s, foreign direct investment was one of the major external sources of financing for most countries that were growing economically. (Economy Watch, 2010) It has also been noted that foreign direct investment has helped several countries when they faced economic hardship.
In recent years, FDI has been used more as a market entry strategy for investors, rather than an investment strategy. Despite the decline in trade barriers, FDI growth has increased at a higher rate than the level of world trade as businesses attempt to circumvent protectionist measures through direct investments. With globalization, the horizons and limits have been extended and companies now see the world economy as their market. (Economy Watch, 2010)
For the reasons mentioned above, it is my judgment that inward investment by Telefonica definitely does benefit a host nation.
Economy Watch (2010). Benefits of foreign direct investment. Economy Watch. Retrieved from http://www.economywatch.com/foreign-direct-investment/benefits.html
Hill,W. L. C. (2013). International business: Competing in the global marketplace. (9th ed.). New York, NY: Irwin/McGraw-Hill
Inward investment can best be described as involving a foreign entity like Telefonica that either invests in or purchases the goods of a local economy. “Rather than creating new businesses or factorings, inward investments often occur when a foreign company acquires or merges with an existing company” (Inward Investment, International Markets, 2013).
Generally speaking when a company invests in a foreign company it helps grow and opens the border to international integration. Great for the company, but the underlying question here is what it does for the economy of the host nation. In the case of Telefonica the investment benefited Latin America exponentially. Not only by bringing the initial investment in the 1990s but also by spurring the emergence of other telephonic companies in the country in the 2000s. As Telefonica
emerged as the telephonic leader in the almost every Latin American country and owned about 40 percent of the continent-wide market share it was generating 18 percent of its revenues from the region. This means that not only was Telefonica contributing to the economy of Latin America it was also helping to improve living standards overall. It is basically a ripple affect contributing to the economy of the local region, which contributes to the surrounding regions and so on and so forth.
Inward Investment, International Markets. (2013). Retrieved from Investopedia: http://www.investopedia.com/terms/i/inward-investment.asp
Hill, C. W. (2013). International Business: competing int he global marketplace 9th ed. New York, NY: McGraw-Hill Irwin.
Riche, J. (2013). What Are the Benefits of Making a Direct Foreign Investment? Retrieved from wiseGEEK: http://www.wisegeek.com/what-are-the-benefits-of-making-a-direct-foreign-investment.htm