ABSTRACT
This chapter addresses the effects of foreign direct investment on the host country. It analyses the effects of foreign direct investment on host economies it is common to distinguish between two broad sets of effects, namely direct and indirect effects. If foreign investment, for instance, raises productivity in the host country and this increase is not wholly appropriated by the investor, other groups in the host country get some direct gains from the investment. The chapter concentrates on one particular aspect of foreign investment, its influence on the technical efficiency of host country firms. Foreign investment can give rise to indirect gains for the host economy through the realization of external economies. Labour productivity may also differ across plants because of scale economies, so one needs to know whether Mexican plants exhibit any diseconomies of scale. Statistical studies of the US economy assume that the larger plants in an industry exhaust available economies of scale.
