Foreign direct investment (FDI)

Definition

Foreign direct investment (FDI) is a long-term investment made by a company or individual in one country in business interests located in another country. This type of investment involves not only the transfer of capital but also the establishment of operational control and a lasting interest in the foreign entity, typically through acquiring a substantial stake or establishing new business operations. FDI is crucial as it contributes to economic growth, facilitates technology transfer, and enhances competitive advantage in international markets.

5 Must Know Facts For Your Next Test

1. FDI can take the form of establishing new business operations (greenfield investment) or acquiring existing businesses (brownfield investment).
2. Countries with stable political environments and favorable economic conditions tend to attract more FDI due to perceived lower risks.
3. FDI plays a vital role in economic development, as it not only brings capital but also creates jobs, enhances skills, and promotes innovation in the host country.
4. The decision to engage in FDI is influenced by factors such as market size, resource availability, regulatory environment, and strategic objectives of the investing firm.
5. In recent years, trends show an increase in FDI flows toward emerging markets as companies seek growth opportunities outside their home countries.

Review Questions

• How does foreign direct investment (FDI) differ from other types of investment, such as portfolio investment?
  • Foreign direct investment (FDI) differs from portfolio investment primarily in terms of control and intent. While portfolio investment involves purchasing financial assets without gaining significant influence over the companies, FDI entails establishing a lasting interest and operational control in a foreign business. This means that through FDI, companies are more deeply involved in the management and strategic decisions of their overseas operations, which can lead to stronger integration into the host country's economy.
• Discuss the impact of foreign direct investment on economic development in host countries.
  • Foreign direct investment significantly impacts economic development in host countries by providing capital inflows that can stimulate growth. It creates job opportunities and helps develop local skills through training and technology transfer. Furthermore, FDI often leads to enhanced infrastructure and increased productivity within the local economy. As multinational corporations invest in new projects or acquire existing firms, they can introduce best practices and innovation, ultimately leading to sustainable development.
• Evaluate the strategic considerations that firms must assess when deciding to engage in foreign direct investment.
  • When firms consider engaging in foreign direct investment, they must evaluate several strategic factors including market potential, political stability, regulatory frameworks, and cultural differences in the host country. Additionally, firms should analyze their own capabilities and resources to manage international operations effectively. Strategic alignment with long-term corporate goals is essential; firms need to determine how FDI can enhance their competitive positioning and provide access to new markets or resources while mitigating risks associated with foreign operations.

Related terms

Portfolio Investment: Portfolio investment refers to the purchase of financial assets such as stocks and bonds in a foreign country without significant influence or control over the companies.

Multinational Corporation (MNC): A multinational corporation is a company that operates in multiple countries, often engaging in foreign direct investment to manage operations globally.

Market Entry Strategies: Market entry strategies are the methods by which a company enters a new market, including options like exporting, franchising, and foreign direct investment.