Foreign Direct Investment (FDI)
FDI: A firm with headquarters in one part of the world, decides to locate a
branch in a different part of the world.
The investment into different part of world = FDI
Reasons Why FDI Occurs:
1) Firm wants to locate a branch in a developed country because of the
abundance of natural resources.
Firm uses those resources to reduce costs of production
2) Big Markets to Invest in
Emerging/ growing Markets - higher potential for growth /profits
3) Low cost of labour
MNCs exploit lower cost labour - lower costs of production
4) Lower regulation/standards
Lower regulation = promotes FDI
Benefits:
1) Injection into Circular Flow - Increase Employment - increased
productive potential
Investment = higher employment = increase LRAS.
2) Fill Savings Gap
Injection used to invest - increase provision of capital goods
3) Positive BOP Benefits
Capital account rises
4) MNCs and Infrastructure Development
MNCs can help expand infrastructure for their own benefit and for the
benefit of developing countries.
Building roads/railway tolower transport costs - improving countries
infrastructure.
5) Improved Productivity Domestically
Local producers have to compete with major MNCs
Must be productive and efficient
6) Technological Transfer
MNC’s are more likely to invest or spend money in R and D - better at
innovation than developing country - developing country benefits.
FDI: A firm with headquarters in one part of the world, decides to locate a
branch in a different part of the world.
The investment into different part of world = FDI
Reasons Why FDI Occurs:
1) Firm wants to locate a branch in a developed country because of the
abundance of natural resources.
Firm uses those resources to reduce costs of production
2) Big Markets to Invest in
Emerging/ growing Markets - higher potential for growth /profits
3) Low cost of labour
MNCs exploit lower cost labour - lower costs of production
4) Lower regulation/standards
Lower regulation = promotes FDI
Benefits:
1) Injection into Circular Flow - Increase Employment - increased
productive potential
Investment = higher employment = increase LRAS.
2) Fill Savings Gap
Injection used to invest - increase provision of capital goods
3) Positive BOP Benefits
Capital account rises
4) MNCs and Infrastructure Development
MNCs can help expand infrastructure for their own benefit and for the
benefit of developing countries.
Building roads/railway tolower transport costs - improving countries
infrastructure.
5) Improved Productivity Domestically
Local producers have to compete with major MNCs
Must be productive and efficient
6) Technological Transfer
MNC’s are more likely to invest or spend money in R and D - better at
innovation than developing country - developing country benefits.
