Foreign Direct Investment & Outsourcing (HL IB Geography)
Revision Note
Written by: Jacque Cartwright
Reviewed by: Bridgette Barrett
Foreign Direct Investment (FDI)
Foreign Direct Investment (FDI) is an investment from one country into the structure, equipment or organisations of another country
FDI is a way for companies to expand their operations into new markets, gaining access to new customers, resources, or talents
This type of investment is different from indirect investments like purchasing stocks, as FDI usually involves active management and control of the foreign business
The 2008–2009 financial crisis saw FDI decline, with inflows decreasing from $1.7 trillion to below $1.2 trillion in 2009
By 2011, inflows had returned to pre-2008 figures and continued to increase until COVID-19, when FDI fell to $929 billion in 2020
Global FDI rebounded by 77% to $1.65 trillion in 2021
However, in 2022, global FDI fell again by 12% to $1.3 trillion because of numerous global crises, such as the war in Ukraine, high food and energy prices and soaring public debt
Despite the overall decline, certain industries like agriculture and extractive industries, usually do well during crises
Europe and North America are currently the largest investors of FDI
Flows of FDI to developing countries are uneven but 2022 saw a global increase of 4%
Africa had the largest decline in FDI flows, at 44%, with landlocked and small-island states receiving the least
Latin America and the Caribbean saw a 51% increase in investment in 2022
Asia saw no change in FDI and Europe spent more than it received in 2022
Advantage | Disadvantage | |
|---|---|---|
NICs and LICs | Export-generated income is higher Reduction of negative trade balances Wealth is spread with rise in labour-intensive manufacturing Export-generated income is higher Local areas benefit from growth in new, higher-paid jobs | Agricultural output is reduced as people are employed elsewhere Rural-to-urban migration increases, placing pressure on core regions Exploitation of workers by TNCs A narrow economic base results in overdependence |
HICs | Imports are cheaper LIC growth increases demand for exports Industrial processes are more efficient Enhanced job prospects lead to increased worker mobility | Lack of jobs for unskilled workers, resulting in skills gap Job losses are worse in areas of concentrated industries Local branch factories are vulnerable to change |
Outsourcing From TNCs
Transnational Corporations (TNCs) are companies that operate in multiple countries
They are important agents of globalisation, creating longer and more frequent connections between countries
TNCs lead to increased flows of FDI, which helps spread cultures and ideas globally
Headquarters are usually based in HIC cities, with research and development (R&D) and decision-making concentrated in growth areas with large supplies of educated and skilled workers; the core
Assembly and production are found in LICs, NICs and depressed regions of HICs where labour costs are lower; the periphery
Labour costs are reduced through investment in technology, automation and subcontracting
Positive and Negative Impacts of TNCs
Positive impacts | Negative impacts |
|---|---|
Employment: TNCs create job opportunities, which can help to create a positive multiplier effect | Environmental degradation: TNCs may exploit natural resources and cause pollution during the production process |
Investment: TNCs use outsourcing or offshoring to maximise profits, bringing FDI into LIC and NIC countries | The exploitation of workers: sometimes workers are forced to work long hours for low pay in poor conditions |
Trade: TNCs can increase trade between the countries they operate in due to the linkages they create | Closure of local businesses: local companies may be unable to compete with TNCs because of their economies of scale |
Technology transfer: TNCs introduce new methods of production in countries, which can improve productivity and create further job opportunities | Increasing inequalities: the large profits generated by TNCs are not evenly distributed, with rich people getting much richer while poorer people see fewer benefits |
Economic development: due to FDI and employment, LIC countries start to achieve more economic growth | Loss of culture: this is sometimes referred to as cultural erosion—the idea that cultural differences start to disappear as TNCs spread western cultural values and ideas |
Education and technical skills: TNCs can invest in training, apprenticeships or scholarships to improve labour skills | Loss of taxes: profits are sent overseas, and taxes are not paid to the host country. TNCs are powerful and are not loyal to a host country's government; investment can disappear as quickly as it came |
Development of energy resources: around 1.6 billion people in developing countries lack access to adequate energy services and rely on wood, dung and biomass for fuel. TNCs invest in small-scale and large-scale power generation projects such as dams and micro hydro power schemes | Exploitation of local resources: TNCs exploit natural resources, whether renewable, as in forests, fisheries and agricultural products, or non-renewable, such as minerals or petroleum, in developing countries |
Examiner Tips and Tricks
It is important to keep your discussions impartial when talking about TNCs and their advantages and disadvantages. You may feel that TNCs exploit their workers, however, they are providing a wage to many people. It might not be ideal working conditions, but for some people, it is the difference between eating or starving.
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