Practise analysing why TNCs undertake FDI and judging its effects on recipient economies using data, extracts and country contexts.
In the first quarter of 2022 the USA and Australia both experienced inflows of foreign direct investment (FDI) of $67 billion and $59 billion respectively. Evaluate the potential economic benefits to a developed country of FDI inflows.
Indicative content guidance
Answers must be credited by using the level descriptors (below) in line with the general marking guidance. The indicative content below exemplifies some of the points that candidates may make but this does not imply that any of these must be included. Other relevant points must also be credited.
QS9: Interpret, apply and analyse information in written, graphical, tabular and numerical forms.
Knowledge, Application, Analysis (12 marks) - indicative content
- Understanding of FDI
Economic benefits could include:
- Inflows into the financial account of the balance of payments
- Long term improvement on the current account of balance of payments if exports rise (a rise in foreign currency earnings)
- Economic growth - greater injection into the circular flow;
AD/AS analysis and multiplier effects on real GDP
- Increase in skills of the workforce if TNCs invest in training programmes
- Increased employment in the host country
- Development of new infrastructure by TNCs
- New methods of production and working practices
- Use of cleaner technology resulting in less negative externalities/ environmental degradation
- Productivity and technology transfer
- Increased tax revenue to government
- Could help close the country's savings gap
N.B. Award maximum of Level 3 ( 9 marks) if a candidate does not refer to a developed country in their answer
Level
Mark Descriptor
0 No rewardable material.
Level 1
1-3
Level 2
4-6
A narrow response or superficial, only two-stage chains of reasoning in
terms of cause and/or consequence.
Level 3
7-9
Demonstrates accurate knowledge and understanding of economic terms, principles, concepts, theories and models.
Ability to apply knowledge and understanding to some elements of the question. Some evidence and contextual references are evident in the answer.
Analysis is clear and coherent. Chains of reasoning in terms of cause and/or consequence are evident but they may not be developed fully or some stages are omitted.
Level 4
10-12
Demonstrates accurate and precise knowledge and understanding of economic terms, principles, concepts, theories and models. Ability to link knowledge and understanding in context using appropriate examples which are fully integrated to address the broad elements of the question.
Analysis is clear, coherent, relevant and focused. The answer demonstrates logical and multi-stage chains of reasoning in terms of cause and/or consequence.
Evaluation (8 marks) - indicative content
- Negative impact on the current account of balance of payments due to the repatriation of profits and dividends by TNCs abroad
- Higher competition for domestic producers who may not be able to compete
- Impact on economic growth depends on the value of the multiplier and/or the level of spare capacity in the economy
- Poorly paid employment and low-skilled jobs if TNCs bring their own skilled workers and managers from abroad
- Increased dependence of economy on decisions made by managers abroad. Significant if the investment is withdrawn in the future which could lead to economic and social disruption (given TNCs are footloose)
- Domestic firms might not benefit if technologies are protected by patents
- Increase in negative production externalities/environmental degradation
- Tax avoidance schemes and transfer pricing could be used by TNCs
- TNCs may exert political influence, e.g. on governments tax policies
- Impact on the economy might be small (if there is little value added)
- Overall impact depends on net FDI (inflows minus outflows)
- FDI inflows as a proportion of GDP is more significant than absolute values e.g. Australia FDI inflows are a larger proportion of GDP compared to USA
Level
Mark
Descriptor
0
No rewardable material.
Level 1
1-3
Identification of generic evaluative comments.
No supporting evidence/reference to context.
No evidence of a logical chain of reasoning.
Level 2
4-6
Evidence of evaluation of alternative approaches.
Some supporting evidence/reference to context.
Evaluation is supported by a partially-developed chain of reasoning.
Level 3
7-8
Evaluation recognises different viewpoints and/or is critical of the
evidence, leading to an informed judgement.
Appropriate reference to evidence/context.
Evaluation is supported by a logical chain of reasoning.
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