Home      fdi
Foreign Direct Investment
The 3 main reasons for the increase in FDI by MNCs are; market seeking, resource seeking and efficiency seeking. Market seeking is where MNCs invest in foreign countries in order to sell their good/service within that country; it may be preferable to produce the good within the country rather than to import it. Market seeking has opened up valuable new markets, for example China, this increases the profits of MNCs and diversifies their revenue stream away from Western economies which are suffering economically.

Resource seeking may occur for MNCs to take advantage of resources in a foreign market, this may be a natural resource (a commodity) or a labour force that is either cheap or possesses necessary skills.
Efficiency seeking is where an MNC locates all or part of their production process in a certain country because they believe they can produce it more efficiently there.

LDCs try to encourage foreign MNCs to set up their production process in their country. This is because it creates jobs and leads to the development of infrastructure which may permit future growth. However the aim of MNCs is to maximise profits and therefore they may be unwilling to pay large amounts of taxes to governments. Therefore governments may have to offer competitive tax rates or even tax holidays to attract MNCs to invest; this may mean that the government receives less revenue to spend on its citizens and infrastructure. 

External Shocks
An important issue arises from globalisation, that is, how well the global economy can adjust to external shocks. There are a number of different shocks which could occur and result in recession across the globe, a few are discussed below.

Oil Prices – There was severe disruption caused by sudden changes in the price of oil in 1973-74 and in 1979-80. Demand in the short run for oil is highly inelastic and so any price increase will have to be absorbed. This can cause hardships for consumers who have higher heating and petrol bills as well as firms who are reliant on oil for production and transport. 

Reasons for sudden price changes may be due to instability in oil-producing regions (mainly the Middle East), current account deficits (which are funded by oil-producers increasing the price of oil) and supply-side problems for example explosions at oil refineries. It may also be due to changes in demand, with the increase in demand from China the price oil had risen steadily during the noughties, however the economic downturn quelled this to an extent.

Financial Crises – Globalisation also leads to the integration of financial markets, this can lead to concerns that a financial crisis has the ability to spread rapidly between countries rather than being contained in a single country. An example of this occurring is the 1997 Asian Financial Crisis as well as the ‘Credit Crunch’ in the Western economies in the late noughties.

Page last updated on 15/04/14