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 control over the operation.

Which part of the balance of payments records an inflow of foreign direct investment?

It is recorded in the financial account.

Why do profits sent home by a foreign-owned subsidiary appear in the current account?

They are investment income paid abroad, so they are a debit in the primary income section of the current account.

How does inward investment raise a country's productive capacity?

It adds to the capital stock and brings better technology, shifting the long-run aggregate supply curve to the right.

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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Impact of Globalisation on Local and National Economies

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Impact of Globalisation on Local and National Economies

Foreign direct investment, growth and the balance of payments

3 things to know
Papers 2 and 3

Overview

Foreign direct investment, greenfield and brownfield, where it appears in the balance of payments, repatriated profits and the current account, trade balance effects, productive capacity and the AD/AS diagram, actual and potential growth, overstated benefits, GNI against GDP, exchange rate effects, location factors, trade blocs, hot money, investment incentives, and financing deficits.

What you need to know

Answer each one before you reveal it.

Your recallNot started

Key term

Give three reasons the growth benefit of foreign direct investment is often overstated.

Key term

Distinguish greenfield from brownfield foreign investment.

Key term

How can foreign direct investment improve a country's trade balance even though it worsens the primary income balance?

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 control over the operation.
2
Distinguish greenfield from brownfield foreign investment.
Model answer
Greenfield investment builds an entirely new facility, while brownfield investment buys or expands a business or site that already exists in the host country.
3
Which part of the balance of payments records an inflow of foreign direct investment?
Model answer
It is recorded in the financial account.
4
Why do profits sent home by a foreign-owned subsidiary appear in the current account?
Model answer
They are investment income paid abroad, so they are a debit in the primary income section of the current account.
5
How can foreign direct investment improve a country's trade balance even though it worsens the primary income balance?
Model answer
The new plant may produce goods for export or replace imports, and if that gain exceeds the profits repatriated the current account improves overall.
6
How does inward investment raise a country's productive capacity?
Model answer
It adds to the capital stock and brings better technology, shifting the long-run aggregate supply curve to the right.

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