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Economic Development

Solutions: Foreign direct investment and trade strategies

  • 3 things to know
  • A2 Units 3 and 4

Overview

Recall questions on Foreign direct investment and trade strategies, Human capital, infrastructure and microfinance, Institutions, and why no single approach works.

What you need to know

Answer each one before you reveal it.

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Key term

Why can export-led growth succeed where import substitution fails?

Key term

Give two costs of relying on foreign direct investment to drive development.

Key term

What is import substituting industrialisation?

Questions from this subtopic

Each one with the model answer underneath.

  1. 1

    Why is foreign direct investment attractive as a development strategy?

    Model answer

    It brings in capital without adding to national debt, and typically carries technology, management expertise, training and access to the investor's export markets, as well as creating jobs and tax revenue.

  2. 2

    Give two costs of relying on foreign direct investment to drive development.

    Model answer

    Profits are largely repatriated rather than reinvested locally, and multinationals may create only low-skill jobs, avoid tax, exploit weak labour and environmental standards, or relocate once incentives end.

  3. 3

    What is import substituting industrialisation?

    Model answer

    Import substituting industrialisation is a strategy of protecting and developing domestic industries so that goods previously imported are produced at home instead.

  4. 4

    What is the case for import substitution?

    Model answer

    Protection allows infant industries time to grow and achieve economies of scale before facing world competition, it reduces dependence on imports and saves scarce foreign exchange, and it diversifies the economy away from primary products.

  5. 5

    Give two weaknesses of import substituting industrialisation.

    Model answer

    Protected firms face no competitive pressure and often remain inefficient and high-cost, and the domestic market is frequently too small for them ever to achieve minimum efficient scale.

  6. 6

    What is export-led growth?

    Model answer

    Export-led growth is a strategy of orientating production towards world markets, expanding output of goods and services in which the country has a cost advantage in order to drive growth through exports.

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