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19 Cards in this Set

  • Front
  • Back

What is FDI?

Foreign Direct Investment is the international movement of capital that involves transfer of capital and control

What gaps in the economy can FDI fill?

1. Savings gap

2. Foreign exchange gap

3. Skills gap

4. Revenue gap (govt)

5. Knowledge gap

Give other advantages of FDI

a) Acquires a specialised good or service essential for domestic production

b) Complements local entrepreneurship through subcontracting

c) Provide contact with overseas banks

d) Train domestic managers and technicians

e) Increase efficiency by removing free trade barriers

f) Increase national income through increased specialisation and economies of scale

Give reasons for international capital movement

a) Large and growing market

b) Host country has high income per capita

c) Access to raw materials in host country

d) Avoid tariff or non-tariff barriers in h.c.

e) Take advantage of lower wages in h.c.

f) Protect market share from competitors setting up in h.c.

g) Risk diversification

h) Profitable investment - firm may have assets and skills to out perform h.c. firms

What is the Rybczynski Theorem?

- Commodity prices fixed by the world

- Factor prices and factor intensities are fixed

- Thus and increase in the endowment of one factor will cause the production of goods intensive in that factor to increase and production of other goods to contract

Apply this theorem to Asia

- Capital and labour sectors grew over together.

- Over time, labour sector shrunk and capital-intensive production grew.

What are the benefits of capital movement to the host country?


a) Output (as in k movement theory)

b) Wages due to redistribution

c) Employment if recipient country has excess labour supply

d) Exports, generating forex to be used by developing countries to import, and assist in development/repaying debts.

What are the benefits of capital movement to the host country? (cont)

e) Increased tax revenues from forex projects

f) Economies of scale - may lower prices of necessary capital for production

g) Provision of technical and mgmt skills and new tech

h) Improve balance of payments as domestic production substitutes for imports

What are the costs of capital movement to the host country?

a) Adverse impacts in terms of trade (Px/Pm)

b) Transfer pricing (misreporting costs so the host govt can't tax profits as much

c) Lower domestic saving - govt may relax

d) Lower domestic investment - forex may raise interest rates and crowd out domestic I

e) Instability in BoP and ER. If profit is sent home, appears as a debit on h.c.'s BoP

What are the costs of capital movement to the host country? (cont)

f) Increased unemployment - foreign firm may bring k-intensive techniques inappropriate for l-intensive economy

g) Local monopoly

h) Lack of local education and skills development. Jobs requiring higher skills aren't given to locals

Describe Hong Kong's FDI policies

- Laissez-faire

- Passive, open door to MNCs

- Didn't intervene to promote industrial development

Describe Singapore's FDI policies

- Sought heavy MNC involvement in manufacturing

- Didn't promote local industries

- Govt intervened to upgrade investors' activities and increase local tech activity

Describe Thai and Malaysian FDI policies

- Active industrial policies

- Promoted local industry but open to FDI

- Non-interventionist in exports sector

Describe Japanese, Korean and Taiwanese FDI policies

- Selectively restrictive FDIs

- Maxed reliance on externalised forms of tech transfer to deepen manufacturing

- Promoted local linkages and innovative capabilities

How does economic structure determine FDI in China?

- Large market size encourages FDI from MNCs

- Abundance of cheap labour

- Coastal infrastructure

- High external economies of scale makes it easier for foreign investors to locate in the same area

How do reduced barriers and preferential policies determine FDI in China?

- Reduced barriers improve investment environment

- Tax concessions and special privileges for foreign investors

- Establishment of open economic zones

How does cultural and legal enviroment determine FDI in China?

- Shared background attract FDI from HK, and Taiwan

- Corruption and poor governance in China deters FDI from Europe and US more than from HK and Taiwan.

How has China's WTO membership impacted FDI?

a) Opens economy further

b) Foreign investors can now acquire business enterprises as well as setting up joint ventures and wholly owned enterprises

c) Removing restrictions on foreign investors


Does China divert FDI from ASEAN economies?

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