Cambridge A Level Economics: MNCs, FDI, external debt, the IMF and World Bank (9708) – Revision Notes

Condensed notes for syllabus outcomes 11.5.3 to 11.5.7 in the Cambridge International AS and A Level Economics 9708 syllabus for examination in 2026, 2027 and 2028. This is A Level content (topic 11), not examined at AS. The syllabus says AS content is assumed knowledge for A Level Paper 3 and Paper 4.

For full explanations read the study guide. Then try the practice set, tick off the checklist, see the course hub and take a free 10-minute diagnostic. All figures here are invented for illustration.

Definitions to learn word for word

Term	Definition
Multinational company (MNC), 11.5.3	A firm that owns or controls operations in more than one country
Foreign direct investment (FDI), 11.5.4	Investment by a firm or person in one country in productive assets or a controlling stake in a business in another country
Portfolio investment	Buying shares or bonds without control; easy to sell quickly
External debt, 11.5.5	Money owed by a country’s government and private sector to foreign lenders
Debt service	Interest plus repayment of principal due in a period
Transfer pricing	Prices set for sales between branches of the same MNC
Conditionality	Policy conditions attached to a loan

11.5.3 MNCs: activities and consequences

Activities: build or buy plants abroad (FDI); split production across countries; trade within the group; transfer technology; set transfer prices; raise finance globally; sell global brands.

Host country: gains	Host country: losses
Jobs, wages, training	Local firms squeezed out
Capital and technology	Profits repatriated
Tax revenue	Transfer pricing cuts tax paid
Exports and competition	Environmental and labour concerns
Supplier linkages	Footloose: may relocate

Home country: gains from profits returned and cheaper imports; may lose jobs if production moves abroad.

Method: assessing an MNC (steps)

1. Name the effect (jobs, tax, technology, balance of payments).
2. Give the chain: cause, then change in a variable, then macro result.
3. Say who gains and who loses.
4. Judge: depends on local sourcing, bargaining power, tax rules, sector, time period.

Reminder: transfer pricing. A subsidiary’s profit before charges is 5.0 million, taxed at 20% in the host. The parent charges 2.0 million extra, taxed at 5% abroad.

• Host tax before: 5.0 × 0.20 = 1.0. After: 3.0 × 0.20 = 0.6. Tax lost: 0.4 million.
• The affiliate pays 2.0 × 0.05 = 0.1 million. Group tax falls from 1.0 to 0.7, a saving of 0.3 million.

11.5.4 FDI: consequences

• Where it appears: the inflow is in the financial account; later profit outflows are in primary income in the current account.
• Gains: investment, technology, jobs, tax, possible exports.
• Costs: profit repatriation, crowding out, dependence, possible sudden exit, resource and environmental damage.
• Gains are larger when: profits are reinvested, inputs are bought locally, the plant exports, tax is collected fairly.

Reminder: share of output staying local. A plant has value added of 60 million. Wages are 18 million and tax is 6 million. The rest, 36 million, is foreign-owned profit.

• Staying in the host economy: (18 + 6) ÷ 60 = 40%.
• Local content share of costs is a separate measure; if 18 of 60 million is spent on local inputs it is 18 ÷ 60 = 30%.

FDI as a share of GDP: FDI inflow ÷ GDP × 100.

11.5.5 External debt

Causes

Cause	Mechanism
Current account deficits	Imports exceed exports; the gap is borrowed
Budget deficits	Government borrows abroad
Low saving	Investment relies on foreign funds
Fall in export earnings	Commodity price falls, worse terms of trade
Rising interest rates	Variable-rate debt costs more
Depreciation	Foreign-currency debt costs more at home
Waste and corruption	Borrowed money earns no return
Shocks	War, disaster, recession

Consequences

• Opportunity cost of debt service in health, education and infrastructure.
• Higher taxes or cuts in spending, lowering growth.
• Pressure on the exchange rate; inflation if the currency falls.
• Higher borrowing costs and fewer lenders.
• Debt trap and loss of policy freedom.

Key ratios

Ratio	Formula
Debt to GNI	external debt ÷ GNI × 100
Debt service ratio	debt service ÷ export earnings × 100

Reminder: variable-rate debt. Debt is 800 million, half at a variable rate. Rates rise 2.5 percentage points.

• Variable part: 800 × 0.5 = 400. Extra interest: 400 × 0.025 = 10 million a year.

Reminder: depreciation. Debt of 500 FCU. The rate moves from 1 FCU = 2.00 to 2.60 home units.

• Before: 500 × 2.00 = 1,000. After: 500 × 2.60 = 1,300. Rise: 300 ÷ 1,000 = 30%.
• The home currency has lost (1 ÷ 2.60 − 1 ÷ 2.00) ÷ (1 ÷ 2.00) = about 23.1% of its value in FCU.
• The debt rises by more than the currency falls, since the debt rise is measured against a smaller base.

Evaluation: debt can be good if it funds projects earning more than the interest; judge by size relative to income, currency, interest rate, use and growth.

11.5.6 The IMF

Role	Detail
Monetary cooperation and stability	Supports the stability of the international monetary system
Surveillance	Monitors economies and exchange-rate policies; advises
Lending	Temporary loans for balance of payments difficulties
Conditionality	Policy conditions on loans, such as deficit reduction
Technical assistance	Training and advice for officials

Evaluation: loans prevent disorderly adjustment and restore confidence. Conditions can reduce output and public services, one policy set may not fit every country, and the long-run effect depends on whether reforms raise growth.

Reminder: austerity effect. A condition cuts government spending by 50 million. With a multiplier of 1.5, GDP falls by 50 × 1.5 = 75 million.

11.5.7 The World Bank

Role	Detail
Development lending	Long-term loans for roads, power, schools, water
Poverty reduction	Very low-interest loans and grants for the poorest countries
Advice	Technical help and support for reforms

IMF versus World Bank

	IMF	World Bank
Focus	Short-run payments and macro stability	Long-run development and poverty
Typical support	Temporary balance of payments loans	Project and programme loans, grants
Both	Attach conditions; can be criticised for policies that ignore local needs

Quick self-test

1. Define a multinational company.
2. Define foreign direct investment.
3. State two differences between FDI and portfolio investment.
4. A host taxes profit at 20%. A subsidiary’s profit before charges is 5.0 million, and the parent adds an internal charge of 2.0 million. Calculate the tax lost by the host.
5. FDI of 60 million enters a country with GDP of 1,200 million. Calculate FDI as a percentage of GDP.
6. Debt service is 45 million and export earnings are 300 million. Calculate the debt service ratio.
7. Debt is 250 FCU. The rate moves from 1 FCU = 8 home units to 1 FCU = 10 home units. Calculate the percentage rise in the home-currency debt.
8. State two causes of external debt.
9. State one role of the IMF.
10. State one role of the World Bank and one way it differs from the IMF.
11. A 50 million loan carries 1% interest from a development lender and 5% from markets. Calculate the annual interest saving.

Answers

1. A firm that owns or controls operations in more than one country.
2. Investment by a firm or person in one country in productive assets or a controlling stake in a business in another.
3. FDI brings control and lasting productive assets; portfolio investment is easy to sell quickly and gives no control.
4. Before: 5.0 × 0.20 = 1.0. After: 3.0 × 0.20 = 0.6. Lost: 0.4 million.
5. 60 ÷ 1,200 × 100 = 5.0%.
6. 45 ÷ 300 × 100 = 15%.
7. 250 × 8 = 2,000; 250 × 10 = 2,500; rise = 500 ÷ 2,000 = 25%.
8. Any two: current account or budget deficits, low saving, falling export earnings, rising interest rates, depreciation, waste, shocks.
9. Any one: surveillance, temporary lending, conditionality, technical assistance, monetary cooperation.
10. Any one World Bank role: long-term development loans, poverty reduction, technical advice. Difference: it focuses on long-run development, the IMF on short-run payments and stability.
11. 50 × 0.05 = 2.5; 50 × 0.01 = 0.5; saving 2.0 million a year.

Where marks are usually lost

• Defining FDI as any foreign investment, with no mention of control or productive assets.
• Writing that MNCs are simply good or bad, with no judgement.
• Missing the link between transfer pricing and lost tax revenue.
• Confusing the debt to GNI ratio with the debt service ratio.
• Forgetting that a falling home currency raises foreign-currency debt in home terms.
• Describing the IMF and World Bank as the same body.
• Listing IMF conditions without their effects on output and living standards.
• Not using the figures in the data when asked to.

Official syllabus

Cambridge International AS & A Level Economics 9708 syllabus for examination in 2026, 2027 and 2028, published by Cambridge University Press & Assessment (Cambridge International), outcomes 11.5.3 to 11.5.7.