Cambridge International AS and A Level Economics: MNCs, FDI, external debt, the IMF and World Bank (9708)

This guide covers 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: multinational companies (MNCs), foreign direct investment (FDI), external debt, the International Monetary Fund (IMF) and the World Bank. Topic 11 is A Level content only, so it is not examined at AS Level. The syllabus says AS content is assumed knowledge for A Level Paper 3 and Paper 4.

All figures below are invented for illustration, and the countries and currencies are fictional. Links: revision notes, practice set, course hub, checklist and free 10-minute diagnostics. Related: current account and floating exchange rates.

What this unit covers

Outcome	What you must be able to do
11.5.3	Define an MNC; describe MNC activities; analyse and evaluate consequences
11.5.4	Define FDI; analyse and evaluate consequences
11.5.5	Explain causes and consequences of external debt
11.5.6	Explain the role of the IMF
11.5.7	Explain the role of the World Bank

Papers 3 and 4 assess knowledge, analysis and evaluation (AO1, AO2, AO3), so each section ends with evaluation points.

11.5.3 Multinational companies

Definition. A multinational company is a firm that owns or controls production or service operations in more than one country. It usually has a head office in a home country and subsidiaries or branches in host countries.

Activities. MNCs typically:

• build or buy plants abroad (this is FDI, covered next);
• split production across countries, placing each stage where costs or skills suit it;
• trade within the group, so one subsidiary sells components to another;
• carry out research at home and transfer technology to subsidiaries;
• raise finance in several countries and sell under global brands;
• set the prices of those internal sales (transfer pricing).

Consequences for a host country

Possible benefit	Possible cost
Jobs and training	Local firms squeezed out
Capital and new technology	Profits sent abroad
Tax revenue and exports	Tax avoidance by transfer pricing
Competition lowers prices	Pollution, weak labour standards
Linkages to local suppliers	Footloose: may leave if costs rise

Home country. It gains returned profits and cheaper imports but may lose jobs if production moves abroad.

Chain of reasoning (jobs). The MNC opens a plant and employs workers. Wages raise household income, spending rises and the multiplier spreads the effect. Training raises productivity, which lifts long-run aggregate supply. The gain depends on how many jobs are new rather than moved from local firms.

Worked example 1: transfer pricing. A subsidiary in Country A earns a profit of 10.0 million A-units before any internal charges. Country A taxes profit at 30%. The parent’s affiliate in a low-tax country is taxed at 10%. The parent charges the subsidiary 4.0 million extra for components, a charge that is pure profit for the affiliate.

• Tax paid in Country A with no extra charge: 10.0 × 0.30 = 3.0 million.
• Reported profit after the charge: 10.0 − 4.0 = 6.0 million.
• Tax paid in Country A now: 6.0 × 0.30 = 1.8 million.
• Tax lost by Country A: 3.0 − 1.8 = 1.2 million.
• Tax paid on the 4.0 million in the low-tax country: 4.0 × 0.10 = 0.4 million.
• Group tax now: 1.8 + 0.4 = 2.2 million, against 3.0 million before. The group saves 0.8 million.

Evaluation. The balance depends on how much is produced and sourced locally, the sector, the host government’s bargaining power and tax rules, whether workers gain transferable skills, and the alternative, which may be no investment. In the short run jobs and capital are visible gains. In the long run technology transfer and local linkages decide whether the benefit lasts.

11.5.4 Foreign direct investment

Definition. FDI is investment by a firm or person in one country in productive assets, or a controlling ownership stake, in a business in another country. Examples are building a factory or buying a majority of a company’s shares. Portfolio investment, by contrast, is buying shares or bonds without control and can be sold quickly.

FDI inflows appear in the financial account of the host’s balance of payments. The profits sent back to the investor later appear as an outflow of primary income in the current account.

Consequences

• Gains: more capital and investment (higher aggregate demand now and capacity later); technology; jobs; tax revenue; possible export growth.
• Costs: profit repatriation worsens the current account in later years; crowding out of domestic firms; dependence on decisions made abroad; resource depletion or environmental damage; possible sudden withdrawal.

Worked example 2: how much stays in the economy. Country A has GDP of 4,000 million A-units. A foreign firm invests 240 million in a plant.

• FDI as a share of GDP: 240 ÷ 4,000 × 100 = 6.0%.
• Each year the plant creates value added of 40.0 million. It employs 500 workers at 16,000 A-units: wages = 500 × 16,000 = 8.0 million.
• Profit before tax = 40.0 − 8.0 = 32.0 million. Tax at 30% = 9.6 million. Profit after tax = 22.4 million, all sent abroad.
• Share of value added staying in Country A (wages plus tax): (8.0 + 9.6) ÷ 40.0 × 100 = 44%. The remaining 56% (22.4 ÷ 40.0) leaves as repatriated profit.
• If local firms lose 120 jobs, net new jobs are 500 − 120 = 380.

The plant adds to GDP, but national income rises by less, because 56% belongs to foreign owners.

Evaluation. Gains are larger when profit is reinvested, inputs are bought locally, the plant exports and the host taxes it fairly. The same plant can reduce a deficit through exports or worsen it through profit outflows and imported inputs.

11.5.5 External debt

External debt is the amount a country owes to foreign lenders: government and private borrowing from foreign banks, governments and international institutions. Debt is not harmful in itself, because borrowing that raises output enough to repay it can raise growth. Problems arise when repayment takes too much of national income.

Causes of debt

• Persistent current account deficits financed by borrowing.
• Government budget deficits financed abroad, for example after a recession, war or natural disaster.
• Low domestic saving, so investment relies on foreign funds.
• A fall in export revenue, such as a drop in the price of a main commodity (a worsening of the terms of trade).
• Rising world interest rates on variable-rate loans.
• Borrowing for projects that earn too little, or waste and corruption.
• Depreciation of the domestic currency when the debt is in foreign currency.

Consequences

• Debt service (interest plus principal) takes money from health, education and infrastructure: an opportunity cost.
• Higher taxes or lower public spending, which can reduce growth.
• Pressure on the exchange rate, because debt must be repaid in foreign currency.
• Higher borrowing costs as lenders see more risk.
• A debt trap: new loans pay old ones.
• Loss of policy freedom if lenders attach conditions.

Worked example 3: debt ratios and shocks. Country B has external debt of 2,400 million foreign currency units (FCU), gross national income (GNI) of 6,000 million FCU, exports of goods and services of 800 million FCU and annual debt service of 120 million FCU.

• Debt to GNI: 2,400 ÷ 6,000 × 100 = 40%.
• Debt service ratio: 120 ÷ 800 × 100 = 15% of export earnings.
• Half the debt (1,200 million) has a variable rate. A rise of 3 percentage points adds 1,200 × 0.03 = 36 million a year.
• New debt service: 120 + 36 = 156 million. Ratio: 156 ÷ 800 × 100 = 19.5%.
• Exports then fall 10%: 800 × 0.90 = 720 million. Ratio: 156 ÷ 720 × 100 = 21.7%.

The ratio rose from 15% to 21.7% without any new borrowing.

Worked example 4: currency depreciation. Country B’s currency is the b-unit. The exchange rate moves from 1 FCU = 4.00 b-units to 1 FCU = 5.00 b-units.

• Debt in b-units before: 2,400 × 4.00 = 9,600 million. After: 2,400 × 5.00 = 12,000 million.
• Rise: (12,000 − 9,600) ÷ 9,600 × 100 = 25%.
• Yearly debt service of 120 FCU rises from 480 to 600 million b-units. If government revenue is 2,400 million b-units, the share going on debt service rises from 20% to 25%.

The b-unit lost 20% of its value (0.25 FCU per b-unit falls to 0.20), yet the debt burden rose 25%. Depreciation raises the domestic cost of foreign-currency debt.

Evaluation. Debt matters according to its size relative to GNI and exports, its interest rate and currency, how the money was used, and the growth rate. Debt relief or rescheduling helps but may carry conditions.

11.5.6 The IMF

The IMF is an international organisation of member countries, created at the Bretton Woods conference of 1944. Its role is to support the stability of the international monetary system.

• Surveillance. It monitors member countries’ economies and exchange-rate policies and gives policy advice.
• Lending. It makes temporary loans to countries with balance of payments difficulties, so they can pay for imports and avoid a sharp fall in output.
• Conditions. Loans usually come with policy conditions, such as reducing a budget deficit or reforming the exchange rate. These are meant to correct the underlying problem.
• Technical assistance. It trains officials, for example in tax collection.

Worked example 5: a balance of payments financing gap. Country B has a current account deficit of 300 million FCU. Private capital inflows cover 180 million, and the central bank can use 40 million of reserves.

• Financing gap: 300 − 180 − 40 = 80 million FCU, which an IMF loan could fill.
• The loan’s condition is to cut the budget deficit from 6% of GDP to 4%. GDP is 6,000 million, so the deficit falls from 360 to 240 million, a cut of 120 million.
• With a multiplier of 1.5, GDP falls by 120 × 1.5 = 180 million, or 3.0% of GDP.

Evaluation. The loan prevents a disorderly adjustment and restores confidence. But conditions can cut output, jobs and public services in the short run, and critics say one policy set does not suit every country. The long-run gain depends on whether reforms raise competitiveness and growth.

11.5.7 The World Bank

The World Bank, also set up at Bretton Woods, focuses on long-term development and poverty reduction rather than short-term payments problems.

• Loans for projects and programmes, such as roads, power, schools and water supply, often on softer terms than commercial lenders (lower interest, longer repayment).
• Support for the poorest countries through very low-interest loans and grants.
• Technical advice and policy support for reforms that raise growth.

Worked example 6: cost of finance. A 200 million FCU loan carries interest of 2% a year from the World Bank, against 7% in commercial markets.

• Interest at 2%: 200 × 0.02 = 4 million a year.
• Interest at 7%: 200 × 0.07 = 14 million a year.
• Annual saving: 14 − 4 = 10 million. Over 20 years of interest alone, the saving is 10 × 20 = 200 million.

IMF versus World Bank. The IMF deals with short-run balance of payments and macroeconomic stability. The World Bank funds long-run development. Both can attach conditions, and both are criticised for policies that may ignore local needs.

Common errors

• Calling any foreign share purchase FDI. Control or lasting productive assets is needed.
• Treating all MNC profits as lost to the host. Wages, local purchases and tax stay.
• Mixing up the debt-to-GNI ratio with the debt service ratio.
• Forgetting that depreciation raises the home-currency cost of foreign-currency debt.
• Treating the IMF and World Bank as identical.
• Listing effects with no judgement. Say which matters most and why.

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.