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Business Economics · Globalisation and multinational business

Multinational Companies and Foreign Direct Investment Explained

Updated 11 October 2026 · Fact-checked

A multinational company (MNC) owns and controls operations in more than one country. Foreign direct investment (FDI) is the investment that gives a firm lasting control over a business abroad. To answer exam questions, state the motive for going abroad, the form of FDI, then the effects on host and home countries, with a judgement.

Understand Multinational Companies and Foreign Direct Investment

A multinational company (MNC) is a firm that owns or controls production or service operations in at least two countries. It has a home country, where it is based, and one or more host countries, where it operates subsidiaries or branches. Exporting alone does not make a firm multinational. Owning and controlling facilities abroad does.

Foreign direct investment (FDI) is the money an investor puts into a foreign business to gain a lasting interest and a degree of control, such as running it or influencing management. It is different from portfolio investment, where you buy shares or bonds abroad for returns, with no control. Portfolio flows are easier to reverse and are more volatile. FDI is longer term. A common statistical rule treats a stake of 10% or more of voting power as direct investment, but the key idea is lasting control and influence.

Why do firms locate abroad? Typical motives are:

  • Market-seeking: reach new customers and avoid trade barriers such as tariffs.
  • Resource-seeking: access raw materials, energy or skilled labour.
  • Efficiency-seeking: lower labour or other costs, or economies of scale across plants.
  • Asset-seeking: acquire technology, brands or know-how.
  • Risk spreading: diversify across economies and currencies.

Forms of FDI include greenfield investment (building new operations from scratch), brownfield or acquisition (buying or merging with an existing firm), joint ventures (sharing ownership with a local partner) and wholly owned subsidiaries. FDI can be horizontal (same activity abroad), vertical (a different stage of the supply chain) or conglomerate (unrelated business).

Effects on the host country can be positive: capital inflow, jobs, technology and skills transfer, higher output and exports, more competition and tax revenue. They can be negative: profits sent home (outflows), crowding out local firms, pressure on the environment and labour standards, dependence on foreign decisions, and transfer pricing to reduce tax. Effects on the home country include repatriated profits and cheaper inputs, but also possible job losses at home and an outflow of capital. The net effect depends on the sector, the policy framework and the bargaining power of the government.

How to solve Multinational Companies and Foreign Direct Investment questions

Use this structure for any short or long question on MNCs and FDI.

  1. 1Read the command word. 'Define' needs a precise statement. 'Explain' needs reasons. 'Discuss' or 'evaluate' needs both sides and a judgement.
  2. 2Define the key terms: MNC, FDI, host and home country, and portfolio investment if relevant.
  3. 3Identify the motive or type in the question: market, resource, efficiency or asset seeking; greenfield, acquisition or joint venture.
  4. 4List effects on the correct party. Check whether the question asks about the host country, the home country or the firm.
  5. 5Give each point with a reason, for example 'technology transfer raises productivity, so output rises'.
  6. 6Add costs and benefits separately, then note what the outcome depends on, such as sector, regulation or the size of profit outflows.
  7. 7Finish with a short, reasoned conclusion. In MCQs, eliminate options that confuse FDI with portfolio investment or mix up host and home.

Quickest way: Control test and host-home grid

When to use it: Use this for MCQs and short answers when time is tight.

  1. Ask: does the investor gain lasting control or influence? If yes, it is FDI. If it is just buying shares or bonds for return, it is portfolio investment.
  2. Draw a quick two-by-two grid in your mind: host or home against benefit or cost.
  3. Pick the motive word: market, resource, efficiency or asset.
  4. Write one benefit and one cost for the party named. Add 'depends on' to show judgement.

Common mistakes in Multinational Companies and Foreign Direct Investment

  • Treating any foreign share purchase as FDI.

    Both involve money flowing across borders, so they look alike.

    Fix: Apply the control test. FDI gives lasting control or influence. Portfolio investment is passive and easier to reverse.

  • Mixing up host and home country.

    Students rush and read 'effects of MNCs' as one general question.

    Fix: Label the countries at the start. The host receives the investment. The home is where the MNC is based.

  • Listing only benefits or only costs of FDI.

    Students memorise one side from notes.

    Fix: Give both sides and say what the net effect depends on, such as sector, local linkages and regulation.

  • Saying exporting makes a firm multinational.

    Selling abroad feels like international business.

    Fix: An MNC owns or controls operations in more than one country. Exporting from one country does not.

  • Confusing greenfield with brownfield investment.

    The terms sound similar.

    Fix: Greenfield means building new from scratch. Brownfield means buying or merging with an existing business. Greenfield creates new capacity, while an acquisition may only change ownership.

  • Calling profit repatriation a loss in every case.

    Students overlook that the investment brought in capital and jobs first.

    Fix: Treat it as a cost to the host's balance of payments over time, weighed against the inflows and benefits.

Worked examples

Example 1

A UK investor buys 2% of the shares of an Indian listed company through the stock market, and a separate Japanese firm builds a new car plant in India that it fully owns. Classify each and explain.

Show the solution
  1. The UK investor holds a small stake and has no control or influence. This is portfolio investment.
  2. The Japanese firm owns and controls a new plant. This gives lasting control, so it is FDI.
  3. The plant is built from scratch, so it is greenfield. It is a wholly owned subsidiary.
  4. Portfolio flows can be sold quickly. The plant is a long-term commitment and is harder to reverse.

Answer: The 2% share purchase is portfolio investment. The new car plant is FDI, specifically greenfield investment through a wholly owned subsidiary.

Example 2

Discuss the effects of a large MNC setting up a manufacturing subsidiary in a developing host country.

Show the solution
  1. Define: an MNC controls operations in several countries. A subsidiary abroad is FDI in the host country.
  2. Benefits: capital inflow, new jobs, training and technology transfer, higher output and possible exports, and tax revenue.
  3. Benefits (continued): competition may push local firms to improve, and local suppliers may gain orders.
  4. Costs: profits may be repatriated, which can cause outflows on the balance of payments.
  5. Costs (continued): local firms may be crowded out, and the MNC may use transfer pricing to cut tax or ignore environmental and labour standards.
  6. Judgement: the net effect depends on how much is bought locally, how skills spread, what the host government negotiates, and how well rules are enforced.

Answer: The effects are mixed. The host gains capital, jobs, skills and revenue, but may face profit outflows, crowding out of local firms and weaker standards. The outcome depends on local linkages and the strength of regulation, so the benefits are greatest when policy captures them.

Exam tips

  • In MCQs, the control test separates FDI from portfolio investment. Check for words like 'control', 'management' or 'lasting interest'.
  • Always name the party affected. Marks are lost when host and home effects are blended together.
  • For 'discuss' questions, give at least two benefits, two costs and a closing judgement using 'depends on'.
  • Know the motives and forms by name: market, resource, efficiency and asset seeking; greenfield, acquisition, joint venture.
  • Link FDI to other topics where useful: balance of payments, exchange rates and trade barriers. Tariffs can encourage FDI as a way to avoid them.

Practice questions from Globalisation and multinational business

Multinational Companies and Foreign Direct Investment in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Multinational Companies and Foreign Direct Investment: frequently asked questions

What is a multinational company and why do they exist?

A multinational company owns or controls operations in more than one country. They exist to reach new markets, access resources, cut costs, gain technology and spread risk. Trade barriers can also push firms to produce locally instead of exporting.

What is the difference between FDI and portfolio investment?

FDI gives the investor lasting control or influence over a foreign business, such as building a plant or buying a large stake. Portfolio investment is buying shares or bonds for returns without control. Portfolio flows are usually more volatile and easier to reverse.

What are the benefits and costs of FDI for the host country?

Benefits include capital, jobs, technology, skills, competition and tax revenue. Costs include profit outflows, crowding out of local firms, dependence on foreign decisions and pressure on standards. The net effect depends on the sector and the policy framework.

What are the main forms of FDI?

The main forms are greenfield investment, acquisitions or mergers, joint ventures and wholly owned subsidiaries. FDI can also be horizontal, vertical or conglomerate depending on how the foreign activity relates to the firm's existing business.