(2021) A Level H2 Econs Paper 1 CSQ Q2

CSQ2: The Impact of FDI Flows in South-East Asia

a.         Wiki: A foreign direct investment (FDI) is an investment in the form of a controlling ownership in a business in one country by an entity based in another country

Foreign direct investment – investment in capital goods (starting a business to produce goods & services) by an entity of an external source.

FDI is measured in the capital & financial account of the balance of payments.

bi.        Opportunity cost is the next best alternative forgone.

Domestic funds could have been used for consumption (either individual purchase of consumer goods or government purchase of consumer goods which can be used for welfare)

bii.       Show PPC curve shifting outwards

c.         An increase in FDI would likely bring about an outflow in the current account of the BOP, causing the current account balance to worsen – specifically the outflow from these sub-components in the current account

1.     Net income from investments – there will be an outflow from this account since these owners of FDI will generate profits after some time and they will likely repatriate part of these profits back to their home country leading to an outflow

2.     Unilateral transfers – there will usually be some foreign workers (e.g. low wage workers or foreign talent to provide expertise) hired by the FDI firm who may repatriate part of their earnings homeleading to an outflow

If export competitiveness improve as a result of FDI transfers of skills / tech / knowledge —> improve export earnings —> improves current account balance

d.         omitted due to CLT

e.         Impacts of domestic investments on SOL

1.     Assuming that income (be it individual) can be spent on the purchase of consumer goods or capital goods. An increase in purchase of capital goods (domestic investments) will mean that there is less purchase of consumer goods  negatively impacting SOL as there are less funds available for purchasing material goods & services

Impacts of investments from external sources on SOL

1.     Investments from external sources has an advantage of bringing about foreign talent & expertise  transfer of skills & knowledge  improves wages of local workers  improves incomes of local workers  ability to purchase goods & services increases  improves material SOL

2.     Foreign direct investmnets more likely to be ‘footloose” – more likely to ‘exit’ in volatile market conditions (less loyalty) , and thus more risk of massive layoffs – less stability negatively impacts non-material SOL

Which should government encourage

1.     Mixture of both is good / have a balance

2.     Mitigate negative implications from both

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