Foreign Direct Investment

Definition

Foreign direct investment (FDI) is an investment made by a company or individual in one country in business interests in another country, typically through establishing business operations or acquiring assets. FDI plays a crucial role in the global economy as it fosters international trade, creates jobs, and contributes to economic development in host countries.

5 Must Know Facts For Your Next Test

1. FDI can take various forms, including greenfield investments where new facilities are built from scratch or brownfield investments where existing businesses are acquired or expanded.
2. Countries with favorable regulatory environments, strong infrastructure, and skilled labor forces tend to attract higher levels of FDI.
3. FDI not only brings capital but also technology transfer, management expertise, and access to international markets for local businesses.
4. Political stability and sound economic policies are critical factors that influence a company's decision to engage in foreign direct investment.
5. Emerging markets often seek FDI as a means to accelerate their economic growth and development, but they face unique challenges such as regulatory hurdles and political risks.

Review Questions

• How does foreign direct investment contribute to economic development in host countries?
  • Foreign direct investment contributes to economic development in host countries by providing capital for new projects, creating jobs, and enhancing local skills through training and knowledge transfer. Additionally, FDI can lead to improvements in infrastructure and services as foreign companies often invest in local facilities. This influx of resources helps stimulate economic growth and can increase the overall competitiveness of the host economy in the global market.
• Discuss how political risk factors influence a company's decision to pursue foreign direct investment.
  • Political risk factors can significantly impact a company's decision to pursue foreign direct investment as they can affect the stability and profitability of operations abroad. Companies assess risks such as government instability, changes in regulations, expropriation of assets, or political unrest before making investment decisions. A country perceived as politically risky may deter investors from committing capital, while those with stable governments and transparent policies are more likely to attract FDI.
• Evaluate the challenges that emerging markets face when attracting foreign direct investment compared to developed economies.
  • Emerging markets face several challenges when attracting foreign direct investment compared to developed economies. These include less stable political environments, underdeveloped infrastructure, and regulatory complexities that can hinder ease of doing business. Furthermore, emerging markets may struggle with issues like corruption or lack of skilled labor. To overcome these challenges and become attractive destinations for FDI, emerging economies must improve their business climates, establish clear regulations, and invest in infrastructure development.

Related terms

Portfolio Investment: Portfolio investment refers to the purchase of financial assets, such as stocks and bonds, in a foreign country without gaining control over the companies issuing them.

Multinational Corporation (MNC): A multinational corporation is a company that operates in multiple countries, often investing in foreign markets to expand its reach and increase profits.

Economic Development: Economic development involves improving the economic well-being and quality of life for a community by creating jobs, increasing incomes, and providing better public services.