Foreign Direct Investment (FDI) – Economics Revision – The Tutor Academy

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Level: AS Levels, A Level, GCSE – Exam Boards: Edexcel, AQA, OCR, WJEC, IB, Eduqas – Economics Revision Notes

What is Foreign Direct Investment (FDI)?

FDI is the purchase of physical capital through the net transfer of funds. It can also be referred to as an investment made to a business located in one country by an organisation in a different country

FDI Net Inflows / Outflows

FDI Inflows are known as the value of inward direct investment made within an economy by non-resident investors

Inward Investment Stock

This refers to the total FDI accumulated over a period of time within a country

Ways a Government can promote FDI in its country

1. Create a Favourable Business Environment

Governments can create stable and predictable legal / regulatory frameworks, establish intellectual property protection and provide support for infrastructure development to help make the country appear more attractive for FDI to take place

2. Offer Financial Incentives

Governments can offer tax breaks, subsidies and other financial incentives – such as exemptions from import duties, grants or loans to over costs etc – to encourage FDI

3. Provide access to Local Markets

Governments can establish Free Trade Zones to provide foreign firms with access to local markets which can facilitate the entry of foreign investors. They can also negotiate trade agreements to encourage FDI to take place

4. Promote the country’s image

Governments can promote the country’s strengths and attract FDI by using marketing PR campaigns. It aims to highlight the country’s skilled labour force, natural resources and strategic location

5. Encourage R&D

Governments can encourage FDI in high-tech industries by investing into Research & Development and providing funding for technology transfer

6. Facilitate the entry of foreign firms

Governments can provide foreign firms looking to enter the country with support such as helping them to navigate local regulations and find suitable business partners

Advantages of FDI

Higher Output and jobs – capital inflows create higher output and opens opportunity for more employment
Finance a Current Account Deficit – capital inflows can help finance a current account deficit
Higher Wages – investment from other countries can lead to higher wages and better working conditions
Sustainable – the long-term capital inflows generated from FDI are more sustainable than the short-term portfolio inflows

Disadvantages of FDI

Controlling Rights – FDI allows multinationals to gain control within foreign countries; in some cases, they may use their financial publicity to gain favourable laws / regulations by influencing local politics
Criticism for Poor Working conditions – some multinationals have been criticised for providing their workers with poor working conditions
Neglection of Environmental Laws – some developing countries may attract FDI in a non-sustainable way, such as by competing on reducing environmental regulation

Quick Fire Questions – Knowledge Check

1. Explain what is meant be ‘FDI’ (2 marks)

2. Define ‘FDI Net Inflows / Outflows’ (2 marks)

3. Define ‘Inward Investment Stock’ (2 marks)

4. Identify and explain six ways a government can promote FDI (12 marks)

5. Identify and explain four advantages of FDI (8 marks)

6. Identify and explain three disadvantages of FDI (6 marks)

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