For example, proceeds from selling an Australian-based domestic manufacturing business to US buyers yielding more than an Australian takeover could be redirected to investment abroad in a start-up company located in Thailand.

In essence, foreign inward investment measures how much capital foreigners are willing to invest in an economy's future with positive effects on the scale of domestic investment, production, and consumption. Meanwhile, foreign investors can earn higher income investing in host economies than at home should the return on the capital deployed exceed the return on that capital in their home economies.

Figure 2 below summarizes the various microeconomic channels through which FDI enhances economic growth and living standards.

Relations between FDI and economic growth

Figure 2: Links between FDI and economic growth

Foreign dominance of certain industries could result from merger and acquisition (M&A) activity which in turn could limit domestic competition in those industries. However, this can be addressed by domestic competition authorities treating the foreign owned firms no differently from domestically owned firms.

For example, assume a foreign supermarket chain invested heavily in a host nation to the extent that it acquired a dominant share of the domestic market. Under these circumstances, the national competition authority (such as the United States Federal Trade Commission or Australian Competition and Consumer Commission) would enforce its governing legislation promoting competition and fair trading in that market for the benefit of domestic residents.

Similarly, there could be problems with transfer pricing by multinational firms. Transfer pricing distorts reported profits across tax jurisdictions, usually by overpricing imported inputs to subsidiaries to minimize tax liability in host economies. But this too need not be an issue for foreign investment policy per se, but a matter for the domestic taxation authorities. Tax authorities have devised and applied rules to limit tax minimisation by transnational companies in this way.

Macroeconomic arguments

In addition to the above microeconomic benefits, there are important macroeconomic benefits that stem from foreign direct investment in particular. For example, when Caterpillar invests in building a production facility in China and then exports all or part of its production from China, China's GDP benefits from the exports and the economy also benefits from the capital inflow. China also benefits

from receipt of intellectual property, from the upgrade in management skills training, and through distribution channels that Caterpillar had already established.

This is not an isolated example. A very substantial portion of inbound foreign direct investment in Asia is to support a multinational company's exports globally. This is true in industrial products, consumer products, automobiles, auto parts and many other goods and services. This kind of FDI has a greater impact than an acquisition of an existing business.