Define foreign direct investment.

Foreign direct investment is investment by a firm in productive assets in another country that gives it a lasting interest in and significant influence over the operation, rather than a purely financial holding.

Give three reasons a multinational undertakes foreign direct investment.

To reach a growing market, to lower its production costs, and to secure supplies of raw materials.

How does inward foreign direct investment raise a host country's productive potential in the long run?

It adds to the capital stock, brings management techniques and technology that local firms can copy, and trains workers, so productivity and long-run aggregate supply rise.

Edexcel A-Level Economics B 9EB0

Scarcity, Choice and Potential Conflicts

Topic overview Scarcity and the economic problem Choice, trade-offs and opportunity cost Profit maximisation, sales maximisation and satisficing Survival, market share and other business objectives Stakeholders and their objectives Stakeholder conflicts and corporate social responsibility

Enterprise, Business and the Economy

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Introducing the Market

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The Role of Credit in the Economy

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Market Failure and Government Intervention

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Revenue, Costs, Profits and Cash

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Introduction to Macroeconomic Policy

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Globalisation

Topic overview The growing economic power of China and India Africa and other emerging markets Rising incomes, firms and shifting employment patterns Nominal and real values Index numbers Trade liberalisation and economic growth Specialisation and comparative advantage Foreign direct investment and growth Trade creation and trade diversion Trading blocs and the single market Trading blocs, firms and growing interdependence Protectionism: tariffs, quotas and other trade barriers Trade negotiations and international institutions Exchange rate changes and the Eurozone

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Impact of Globalisation on Global Companies

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Impact of Globalisation on Local and National Economies

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Global Labour Markets

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Inequality and Re-Distribution

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Competition and Market Power

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Market Power and Market Failure

Topic overview Cartels, collusion and restrictive practices Monopsony, natural monopoly and power in the labour market The implications of market failure for firms, consumers and government Promoting competition: anti-competitive practices, mergers and privatisation Regulating natural monopolies and protecting consumers and employees The Competition and Markets Authority and EU competition policy The benefits and costs of regulation

Market Failure Across the Economy

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Macroeconomic Policies and Impact on Firms and Individuals

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Globalisation

Foreign direct investment and growth

3 things to know
Papers 2 and 3

Overview

Foreign direct investment, greenfield against brownfield, why multinationals invest abroad, short-run and long-run effects on host country growth, technology transfer, profit repatriation, transfer pricing, footloose capital, crowding out domestic firms, political stability, the balance of payments, and outward investment.

What you need to know

Answer each one before you reveal it.

Your recallNot started

Key term

What is the difference between greenfield and brownfield foreign direct investment?

Key term

How does inward foreign direct investment raise a host country's growth in the short run?

Key term

What is technology transfer?

Questions from this subtopic

Each one with the model answer underneath.

1
Define foreign direct investment.
Model answer
Foreign direct investment is investment by a firm in productive assets in another country that gives it a lasting interest in and significant influence over the operation, rather than a purely financial holding.
2
What is the difference between greenfield and brownfield foreign direct investment?
Model answer
Greenfield investment builds entirely new facilities in the host country, while brownfield investment acquires or expands existing ones, usually by buying a local firm.
3
Give three reasons a multinational undertakes foreign direct investment.
Model answer
To reach a growing market, to lower its production costs, and to secure supplies of raw materials.
4
How does inward foreign direct investment raise a host country's growth in the short run?
Model answer
Building and equipping the new facility is an injection of investment into the circular flow, which raises aggregate demand and, through the multiplier, income and output.
5
How does inward foreign direct investment raise a host country's productive potential in the long run?
Model answer
It adds to the capital stock, brings management techniques and technology that local firms can copy, and trains workers, so productivity and long-run aggregate supply rise.
6
What is technology transfer?
Model answer
Technology transfer is the spread of production techniques, know-how and management practice from a foreign investor to local suppliers, workers and competitors.

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