The reasons for foreign direct investment and the growth of multinational companies, the methods of entering overseas markets including offshoring, outsourcing and joint ventures, and the impact of multinationals on host and home countries and the control of them.

What this theme is asking

OCR wants you to explain why firms invest abroad and become multinationals, the ways they enter overseas markets (offshoring, outsourcing, joint ventures), and the impact of multinationals on host and home countries. This is a central Component 3 topic, often with the biggest evaluation questions.

Foreign direct investment and the growth of multinationals

Firms make FDI and expand into multinationals for several reasons: to access new markets (especially fast-growing emerging economies), to obtain cheaper or better resources and labour, to be closer to customers or raw materials, and to get around trade barriers (producing inside a country or bloc avoids its import tariffs). Falling transport and communication costs have made running operations across many countries far more feasible.

Methods of entering overseas markets

The right method depends on the firm's resources, how much control and commitment it wants, and how unfamiliar or risky the market is. A cautious firm entering an unfamiliar market often starts with exporting or a joint venture; a confident firm with capital may offshore or acquire.

Offshoring and outsourcing

These two are often confused. Offshoring means moving the firm's own activities to another country (it still owns and runs them). Outsourcing means handing an activity to another firm (which may be at home or abroad). A firm can do both (offshoring to its own overseas plant, or outsourcing to a foreign contractor). Both aim to cut cost or access skills, with the trade-off being reduced control, especially over quality and ethics, and exposure to supply-chain risk.

The impact of multinationals on host and home countries

For home countries, multinationals can bring back profits and maintain headquarters jobs, but offshoring production can cost domestic manufacturing jobs. The overall effect is contested and depends on the specific case.

Controlling multinationals

Because large multinationals can be more powerful than the governments hosting them, there is a debate about control: through host-country regulation (labour, environmental and tax rules), international agreements, and pressure from consumers and pressure groups that can force firms to improve conduct through the threat of boycotts and reputational damage. Effective control depends on government capacity and global cooperation, which is why weakly regulated developing countries are most exposed.

Examples in context

Global manufacturers have offshored production to lower-cost countries to cut costs, while outsourcing functions such as customer service to overseas contractors. Carmakers have made FDI inside trading blocs to gain tariff-free access. Debates over the labour conditions in some multinationals' overseas supply chains, and over the tax some pay, illustrate both the impact of multinationals and the difficulty of controlling them.

Try this

Q1. State what is meant by foreign direct investment. [2 marks]

• Cue. Investment by a firm in productive assets (such as a factory) in another country, giving it a lasting interest and control there.

Q2. Analyse one benefit to a host country of a multinational setting up operations there. [6 marks]

• Cue. For example, the investment creates jobs and incomes and transfers skills and technology, stimulating the local economy, developed as a chain in context.