Foreign direct investment (FDI)

Definition

Foreign direct investment (FDI) refers to the investment made by a company or individual in one country in business interests in another country, typically by establishing business operations or acquiring assets. This form of investment plays a crucial role in economic development, as it can drive growth through capital inflow, technology transfer, and job creation, while also impacting local economies and global market dynamics.

5 Must Know Facts For Your Next Test

1. FDI can contribute significantly to a country's GDP by bringing in capital, which can be used for infrastructure development and enhancing productivity.
2. Developing countries often attract FDI due to lower labor costs and the potential for higher returns on investment compared to developed markets.
3. Governments may create favorable conditions for FDI by offering incentives like tax breaks, subsidies, or relaxed regulations to attract foreign investors.
4. FDI can lead to technology transfer, where foreign firms bring advanced technologies and practices that can enhance local industries' efficiency and competitiveness.
5. However, FDI may also result in challenges such as profit repatriation, where foreign firms send profits back to their home countries instead of reinvesting in the local economy.

Review Questions

• How does foreign direct investment (FDI) contribute to economic growth in developing countries?
  • Foreign direct investment (FDI) contributes to economic growth in developing countries by providing essential capital for development projects and creating job opportunities. It often leads to the establishment of new businesses and expansion of existing ones, stimulating local economies. Additionally, FDI brings technology transfer and skills development, which can improve productivity and foster innovation in the host country's industries.
• Discuss the role of multinational corporations (MNCs) in shaping the landscape of foreign direct investment (FDI) globally.
  • Multinational corporations (MNCs) play a significant role in shaping the landscape of foreign direct investment (FDI) as they engage in cross-border investments to expand their operations and tap into new markets. MNCs can influence local economies by introducing new technologies and management practices while creating jobs and contributing to tax revenues. However, their presence can also lead to concerns over profit repatriation and potential exploitation of local resources if not managed properly.
• Evaluate the long-term impacts of foreign direct investment (FDI) on technology transfer and absorption in developing countries.
  • The long-term impacts of foreign direct investment (FDI) on technology transfer and absorption in developing countries are multifaceted. On one hand, FDI can lead to significant advancements in local industries by introducing cutting-edge technologies and expertise that enhance production capabilities. On the other hand, the effectiveness of technology absorption depends on the host country's existing infrastructure, educational systems, and regulatory frameworks. If these elements are well-developed, FDI can significantly boost innovation and competitiveness; otherwise, it might result in dependency on foreign firms without substantial local capacity building.

Related terms

Portfolio Investment: A type of investment that involves buying financial assets like stocks and bonds in another country, without direct control over the businesses.

Multinational Corporation (MNC): A company that operates in multiple countries, often conducting FDI to expand its business and access new markets.

Technology Transfer: The process of sharing knowledge, skills, and innovations between organizations, often facilitated by FDI.