Foreign Direct Investment (FDI)

Definition

Foreign Direct Investment (FDI) is an investment made by a company or individual in one country into business interests located in another country, typically involving the establishment of business operations or acquiring assets in the foreign market. This type of investment is significant because it often includes not just capital but also management expertise and technology transfer, which can lead to mutual economic benefits for both the investor and the host country.

5 Must Know Facts For Your Next Test

1. FDI can take various forms, including greenfield investments (building new facilities) and mergers and acquisitions (buying existing companies).
2. Countries actively encourage FDI as it can create jobs, boost local economies, and lead to technology and skill transfers.
3. The United States is one of the largest sources and recipients of FDI globally, playing a crucial role in shaping international investment patterns.
4. Political stability, market size, and favorable regulatory environments are critical factors that attract foreign direct investment.
5. FDI can significantly impact the host country's balance of payments, as it involves the inflow of capital but may also result in profit repatriation back to the investor's home country.

Review Questions

• How does foreign direct investment (FDI) differ from other forms of investment, such as portfolio investment?
  • Foreign direct investment (FDI) differs from portfolio investment mainly in its level of control and engagement. While portfolio investments involve purchasing financial assets like stocks and bonds without significant influence over the companies, FDI entails direct involvement in managing or establishing business operations in a foreign country. This deeper level of engagement means that FDI not only provides capital but also brings along management expertise and technology that can greatly benefit the host country.
• What are some key benefits that host countries experience from attracting foreign direct investment?
  • Host countries experience several benefits from attracting foreign direct investment, including job creation, which can reduce unemployment rates and stimulate economic growth. FDI also leads to technology transfer, helping local industries modernize and become more competitive. Additionally, it can enhance infrastructure development as companies may invest in local facilities and services. Lastly, FDI can contribute to improved trade balances by boosting exports produced in the host country.
• Evaluate the impact of political stability on foreign direct investment decisions made by multinational corporations.
  • Political stability plays a crucial role in shaping foreign direct investment decisions made by multinational corporations. A stable political environment reduces risks related to expropriation, sudden changes in regulations, or civil unrest, making it more attractive for companies to invest in a host country. On the other hand, countries with political instability may deter potential investors due to uncertainty about their investments' safety and profitability. Thus, multinational corporations often conduct thorough risk assessments related to political conditions before committing to FDI.

Related terms

Portfolio Investment: A type of investment where an investor purchases financial assets such as stocks and bonds in a foreign country without seeking significant control over the companies.

Multinational Corporation: A company that has operations in multiple countries, often engaging in FDI to expand its market reach and resources.

Host Country: The country in which foreign direct investment takes place, where the investing entity sets up operations or acquires assets.