4.1.2 - Foreign Direct Investment (FDI) + Exports/Imports

Other facts about FDI

• As trade barriers are reduced, the flow of FDI increases. • FDI provides finance for investment and helps create jobs. • The poorest countries see very little FDI as MNC's do not think it's worth investing in these economies as they're are unlikely to make profit. Therefore, FDI only tends to occur in developing, and some developed, countries.

Why do FDI?

• Firms may prefer FDI rather than exporting their goods or licensing • Managers want to keep a tight control over operations in another country. • Firms want to protect intellectual property (e.g. China make knock off copies of many goods, these can be a threat as it provides consumers with more alternatives).

Exports and Imports

Exports are the selling of goods and services to another country. e.g. if the U.K. sells a car abroad, the money inflows to the U.K. or If a tourist visits the U.K. the money flows into the U.K. economy. Imports are the buying of goods and services from another country. e.g. if a U.K. business buys raw materials from abroad, the money flows out of the U.K. *Balance of payments = Exports - Imports* Own knowledge: The U.K. imports around £32bn worth of products/services to the U.S. annually. + The U.K. exports around £40bn to the U.S annually.

Foreign Direct Investment (FDI)

FDI is when a firm invests in another country by setting up operations or buying assets in their economy. e.g. Tesco invested (entered) into the U.S. market by opening a store called "Fresh 'n' Easy". However it failed Most FDI is horizontal, with the duplication of production facilities in different countries. Some FDI occurs where different stages of production process occurs in different countries.

The theory behind FDI.

Japanese theorist Terumoto Ozawa, similarly to Michael Porter, believes that businesses will operate where they can gain a competitive advantage, e.g. they can exploit less developed countries by operating there because the minimum wage is low. However, this also creates income and wealth for these less developed countries. This leads to economic growth through consumption that attracts more FDI for the domestic businesses. Rising standards of living and greater use of technology leads to more FDI, external economies of scale occurs as domestic businesses capitalise on this by supplying raw materials to the MNC's. They experience growth as well as the MNC.

Other factors affecting Exports and Imports

Price is not the only factor in determining exports and imports. Exports will increase if: - *Real GDP of other countries increases.* (other countries experiencing economic growth leads to higher wages in their country, which leads to higher spending due to the marginal propensity to consume). - Productive capacity increases, allowing for more sales to be made.

Factors affecting Exports and Imports - Exchange rates

*Exchange rates:* An increase in exports to the U.S. will increase demand for the pound. Because Americans have to use pounds to purchase these goods/services. This causes and outward shift in demand for the pound. P1 > P2 shows the increase in price/value of the pound. This shows that the pound has appreciated. However, an increase in the price/value of the pound means that exports are likely to decrease in the long run. On the other hand, a depreciation in the exchange rate (pound) will make exports cheaper, this should eventually lead to an increase in exports in the long run. Although, a depreciation in the exchange rate will also make imports more expensive, in the short run. As the pound now holds less purchasing power.

Factors affecting Exports and Imports - Price elasticity

*Price elasticity:* Because, *in the short run*, a depreciation in the exchange rate will make imports more expensive. Imports on goods which are price inelastic will increase the total spending of imports. e.g. If the U.K. import petrol from abroad, it is likely to have a larger effect on imports compared to importing a good, such as bread. Importing goods which are more price inelastic is likely to worsen the balance of payments. It will also lead to inflationary pressures on the economy, due to the rise in prices. (because the pound is weaker) *In the long run*, it is easier to substitute imported goods for domestic goods. As consumers, businesses and the government become more aware of the increase in prices due to expensive imports, they are likely to change their spending habits. e.g. Nowadays, people are far more willing to use electric cars, bikes, etc. over petrol powered cars. because petrol is so expensive.

Factors affect Exports and Imports - The state of the economy

As global demand and supply changes so will imports and exports; e.g. A strong economy will import goods and services solely to meet its needs, this may lead to an increase in domestic consumption. which decreases imports. (Demand) e.g. If a country increases its productive capacity this will allow it to increase its supply to the rest of the world. Therefore this will lead to an increase in exports. (Supply) China is the biggest economy in terms of global exports. They have taken advantage of their low costs (low wages) and technology to provide wide range of goods/services at very cheap prices. This increases global demand for their products, hence increasing exports. However, as China experience economic growth their costs will increase (as wages increase) making it difficult to meet the demand with supply.