Merit Goods & Inward Foreign Direct Investment (DP IB Economics)

Strategy

Explanation

 Advantages

Disadvantages 

Education programs

• These include pre-school, primary, secondary and tertiary education programs which are free at the point of consumption, but paid for with tax revenue

• Education helps to intervene and break the poverty trap by increasing human capital

• Increased human capital results in higher productivity and output

• Higher output can lead to higher wages which improve the standard of living

• Higher wages may lead to more consumption and an increase in aggregate demand

• Education programs take a long time before there is an increase in productivity

• There is an opportunity cost associated with the provision of education

• Education may still be under consumed in developing nations as children are required to work for the family: family survival depends on the income they generate

Health programs

• These range from emergency-only healthcare to full healthcare and preventative healthcare (e.g. cancer screening) programs, which are free at the point of consumption, but paid for with tax revenue

• Universal access to vaccinations can improve life expectancy and productivity significantly

• Improved health care helps to break the poverty trap

• Each health care intervention by the government requires expenditure and so carries an opportunity cost

• How much health care should be provided is a normative issue and is subject to political pressure and ideology

Infrastructure projects

• Infrastructure - including energy, transport, telecommunications, clean water and sanitation -  

• Infrastructure can play a direct role in improving the health and standard of living

• Telecommunications speed up the flow of information and exchange of knowledge and ideas which can directly help to improve human capital and the standard of living

• Access to energy has a significant effect on productivity e.g. the opportunity cost of previously spending time looking for heating fuel can now be used more productively

• Each infrastructure project requires significant government spending and so carries an opportunity cost

• Infrastructure projects may take a long time to complete

• Infrastructure projects are subject to political pressure and lobbying

Advantages of FDI

Disadvantages of FDI

• FDI can be a major source of finance in less economically developed countries

• FDI helps to generate extra national income which can increase the level of savings - and higher savings can help to increase funds available for domestic investment

• Expansion of supply can lead to increased employment opportunities

• The government may receive higher tax revenue generated by the increased profits from the additional level of national output

• As more foreign firms invest, governments often start to develop new infrastructure to support their business activity

• Weak local regulations are often exploited leading to poor working conditions and increased negative externality's of production

• Profits tend to be moved off-shore or returned to the home country of the multinational firms which means that less is reinvested back into the development of the host nation

• Multinational firms often pay very little tax to host nations as they use sophisticated corporate practices to reduce the amount of tax they are liable for (e.g.transfer pricing )

• Local firms may struggle to compete with multinational firms who are now based in their country - and they go out of business

• Multinationals are likely to have the power to keep wages low

• Multinationals may use workers from their country for management roles and only employ local unskilled labour for manual tasks. The workers may not develop many new skills from the role