Foreign direct investment (FDI)

Definition

Foreign direct investment (FDI) is a financial investment made by a company or individual in one country into business interests located in another country. This type of investment typically involves acquiring a significant degree of control over the foreign business operations, which can lead to various strategic advantages and opportunities for growth in international markets.

5 Must Know Facts For Your Next Test

1. FDI is crucial for economic development as it brings capital, technology, and expertise to the host country, contributing to job creation and infrastructure improvements.
2. Countries often attract FDI through incentives such as tax breaks, regulatory advantages, and improved infrastructure to create a more favorable business environment.
3. There are two main types of FDI: horizontal investment, where a company invests in the same industry abroad; and vertical investment, where a company invests in different stages of production within the supply chain.
4. Political stability and favorable relations between countries can significantly impact the flow of FDI, as investors seek secure environments for their investments.
5. The rise of emerging markets has made FDI increasingly important, as companies look to tap into new consumer bases and take advantage of lower production costs.

Review Questions

• How does foreign direct investment (FDI) contribute to economic development in host countries?
  • Foreign direct investment contributes to economic development in host countries by injecting capital that can be used for infrastructure projects, creating jobs, and enhancing technological capabilities. When multinational corporations invest in local businesses, they often bring advanced technologies and best practices that can improve productivity. Additionally, FDI can stimulate local economies by increasing demand for goods and services and encouraging domestic entrepreneurship.
• Evaluate the impact of political stability on foreign direct investment flows into a country.
  • Political stability plays a critical role in attracting foreign direct investment. Investors are generally more likely to commit capital to countries with stable governments and predictable regulatory environments. Conversely, political instability can deter FDI as it introduces risks such as expropriation, changes in policies, or civil unrest. This can lead companies to prefer investing in regions perceived as safe and stable, which may result in uneven economic growth across nations.
• Assess how globalization has influenced the trends and patterns of foreign direct investment in recent years.
  • Globalization has significantly transformed the trends and patterns of foreign direct investment by increasing interconnectedness among economies. As barriers to trade and investment have diminished, companies are now more inclined to seek growth opportunities beyond their domestic markets. This has led to increased competition among countries to attract FDI through favorable policies. Moreover, emerging markets have become more appealing destinations for FDI as companies pursue new customer bases and leverage cost efficiencies. Overall, globalization has reshaped the landscape of international business and investment.

Related terms

Multinational Corporation (MNC): A multinational corporation is a company that operates in multiple countries, managing production or delivering services from various locations around the globe.

Portfolio Investment: Portfolio investment refers to investing in financial assets such as stocks and bonds in a foreign country, where the investor does not seek control over the businesses.

Joint Venture: A joint venture is a business arrangement where two or more parties agree to pool their resources for a specific project or business activity, often used as a method for entering foreign markets.