Foreign Direct Investment

Question 1

What is FDI?

Answer 1

An influx of capital, skills and technology which can boost economic growth, tax and jobs

Question 2

The UK was the (1) top FDI destination in (2) our biggest FDI investments came from (3)

Answer 2

1 - EU
2 - 2015
3 - USA, India and China

Question 3

Name the four types of FDI

Answer 3

Foreign Acquisitions
Offshoring
Transfer pricing
Foreign mergers

Question 4

Define ‘offshoring’

Answer 4

Some TNCs build production facilities in foreign low wage economies e.g. Fender opened Mexican plant in 1987

Question 5

Define ‘foreign mergers’

Answer 5

Two firms in different countries join forces to create a single entity e.g. Royal Dutch Shell has headquarters in both the UK and Netherlands

Question 6

Define ‘foreign acquisitions’

Answer 6

When a TNC launches a takeover of a company in another country e.g. 2010 Cadbury was taken over by US company ‘Kraft’

Question 7

How does the UK and USA views differ in foreign acquisitions

Answer 7

UK has few restrictions but Committee on Foreign Investment in USA closely scrutinises inbound foreign takeovers

Question 8

Define ‘transfer pricing’

Answer 8

Some TNCs sometimes channel profits through a subsidiary company in a low tax country such as Ireland, the Organisation for Economic Cooperation and Development is attempting to limit this

Question 9

Define FDI

Answer 9

The net transfer of funds to purchase and acquire physical capital such as factories

Question 10

What are FDI net inflows

Answer 10

The value of inward direct investment made by non-resident investors in the reporting economy usually reported by year

Question 11

What is inward investment stock?

Answer 11

The total accumulated level of FDI in a country

Question 12

Name five benefits of FDI to MNCs

Answer 12

1 - lower labour costs 
2 - proximity to raw materials
3 - avoid barriers to trade 
4 - reduce transport costs 
5 - access to more domestic markets and local knowledge

Question 13

Give five advantages of Capital Inflows

Answer 13

• capital inflows create higher output and jobs
• capital inflows help finance a current account deficit
• long term capital inflows are more sustainable than short term portfolio inflows
• recipient country benefit from knowledge and expertise of TNCs
• abroad investment could lead to improved working conditions especially when TNCs more conscious of their public image

Question 14

Give four potential disadvantages of FDI

Answer 14

• MNCs controlling rides makes national gov inferior
• FDI can bypass local environment laws
• Doesn’t benefit recipient country due to little distribution of wealth
• MNCs have poor working conditions and take advantage of lower wage costs

Question 15

Give three reasons of why FDI has increased significantly in the past few decades

Answer 15

• lower transport costs
• increases technology increase low capital intensive start ups
• increases global trade and lower tariff costs