In which way can the home country's balance of payments benefit from FDI made in a foreign country?

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Question: In which way can the home country's balance of payments benefit from FDI made in a foreign country?

Option a: From the inward flow of foreign earnings. This choice points to the earnings that returns or profits generated abroad by the foreign subsidiary and remitted back to the home country. Such inflows improve the current account component of the balance of payments by adding to the home country’s receipts from abroad, especially if these earnings are repatriated as payments to the home country.

Option b: From the outward flow of foreign earnings. On the surface this seems plausible as a counterpoint, but outward earnings—profits sent from the home country to foreign affiliates—would typically be a payment out and could worsen the home country’s balance of payments, not improve it, unless offset by productivity gains or trade benefits. In most standard analyses, this is not the direct positive channel.

Option c: If FDI is a substitute for direct exports. If FDI substitutes for exports, the home country might lose export income that it would have earned otherwise. This could reduce the positive balance of payments effects from trade, making it a less favorable route for BoP improvement, not a straightforward positive.

Option d: From cash outflow during the initial investment to finance the FDI. The initial outflow is a financing outflow from the home country, which tends to worsen the BoP in the short term unless it coincides with future inflows or asset transfers that offset it. As a result, this option describes a BoP burden rather than a benefit.

To determine which option best describes a BoP benefit from FDI, consider how earnings generated abroad can be brought back to the home economy and recorded as an inflow. Such remittances or repatriated profits directly affect the current account by increasing receipts from abroad, which is a recognized pathway for BoP improvement. By contrast, the other options describe outflows, substitutions that can dampen trade benefits, or initial financing outlays that typically worsen the BoP before any future gains materialize.

In summary, the reasoning behind option a rests on the mechanism by which foreign earnings that are repatriated contribute positively to the home country’s BoP, whereas options b, c, and d describe scenarios that either reduce BoP benefits or impose initial costs before any potential upside.

In which way can the home country's balance of payments benefit from FDI made in a foreign country?Single choice

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