Foreign Direct Investment (FDI) & External Investment (Cambridge (CIE) A Level Economics): Revision Note

FDI provides external capital where domestic savings are insufficient to fund needed investment

Direct employment in FDI-funded operations and indirect employment through local supplier linkages

Workers and local firms gain exposure to advanced production methods and management practices

Corporate, employment and indirect taxes from FDI operations expand the host government's tax base

FDI-funded production destined for global markets generates foreign exchange

Long-term commitment makes FDI less prone to sudden reversal during crises

Returns flow back to the home country, reducing the long-run benefit to the host economy

If MNCs import most inputs from abroad, the multiplier effect on the host economy is small

Better-resourced foreign firms may displace local enterprises

Transfer pricing can shift reported profits to low-tax jurisdictions, reducing host tax revenue

Host economies can lose significant employment and revenue if MNCs relocate

Governments borrow to fund infrastructure, education and healthcare investment that exceeds domestic resources

Countries that consistently import more than they export must finance the gap through external borrowing

Sudden events such as oil price spikes, commodity price collapses or pandemics disrupt revenue and force additional borrowing

When global rates rise (such as during the 1979–82 Volcker shock or the 2022–23 Federal Reserve tightening), debt service costs rise sharply for borrowers

Debt denominated in foreign currency (typically US dollars) becomes more expensive to service when the local currency falls

Sudden withdrawal of foreign capital can force governments to borrow at unfavourable terms to maintain reserves

Periods of abundant global credit (1970s petrodollar recycling, 2010s low interest rates) encourage over-borrowing

Interest and principal repayments divert resources from productive uses

Debt service competes with spending on health, education and infrastructure

• Many heavily indebted economies spend more on debt than on healthcare

Debt in foreign currencies becomes more expensive when the local currency depreciates, creating self-reinforcing crisis dynamics

Restructuring agreements with the IMF often require austerity measures, tax rises or privatisation

Inability to repay forces default, damaging the country's credit rating and access to future borrowing

Very high debt levels deter both foreign and domestic investment, as future returns are expected to be taxed away to service debt