Cambridge International as and a level Economics Ebook

virtuous 
cycle
may be created as shown in 
Figure 9.30
.
One of the reasons China achieved rapid economic 
growth in the 1990s and fi rst decade of the twenty-fi rst 
century is, in part, because of high levels of investment. 
Th
e country already had high levels of savings but 
over these two decades it also developed its range and 
sophistication of fi nancial institutions.
Multinational corporations and foreign 
direct investment
One way that developing economies can achieve a rise 
in investment is to attract multinational companies. A 
multinational corporation (MNC) is defi ned as a fi rm 
that operates in more than one country. In other words, it 
is a business with a parent company based in one country 
but with production or service operations in at least one 
other country. Th
e largest MNCs – such as the Coca-Cola 
Corporation, Ford, Hilton Hotels, Nestlé, McDonald’s, Tata, 
Toyota and so on – are global operations, with manufacturing 
and retail outlets in many countries of the world.
Th
rough their activities, MNCs provide 
foreign direct 
investment (FDI)
to the economies in which they operate. 
Th
is is investment that is necessary to produce a good or 
service in a foreign country. FDI, therefore, involves capital 
fl ows between countries. It should not be confused with port-
folio investment, which is the purchase of shares by foreign 
investors in businesses that are located in another country.
Foreign direct investment (FDI): 
the setting up of 
production units or the purchase of existing production units 
in other countries.
KEY TERM
Th
e activities of MNCs and the eff ects of FDI on the 
economies of the recipient countries have been the 
subject of much debate and discussion by economists 
and politicians. MNCs can bring in new technology, 
Figure 9.30 
A virtuous cycle
Increase in
investment
Increase in
productivity
Increase
in savings
Increase in
income