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 by establishing business operations or acquiring assets. This form of investment involves a significant degree of influence and control over the foreign business operations, distinguishing it from other types of international investments. FDI plays a vital role in international market entry strategies as it allows companies to expand their reach, access new markets, and leverage local resources.

5 Must Know Facts For Your Next Test

1. Foreign direct investment can take various forms, including building new facilities, acquiring existing businesses, or expanding operations of foreign companies.
2. FDI is often driven by the desire to access new markets, reduce production costs, and take advantage of local resources or favorable regulations.
3. Countries with stable political environments, skilled labor forces, and strong infrastructure tend to attract more foreign direct investment.
4. The growth of globalization has led to an increase in FDI as businesses seek opportunities beyond their home markets.
5. Governments may offer incentives, such as tax breaks or subsidies, to attract foreign direct investment and stimulate economic growth.

Review Questions

• How does foreign direct investment differ from other types of international investments?
  • Foreign direct investment differs from other international investments primarily through the level of control and influence exerted over the foreign business. Unlike portfolio investments, which involve buying financial assets without significant control, FDI involves establishing operations or acquiring assets in a foreign country. This means that with FDI, companies have a direct stake in the management and operations of the business they invest in, allowing them to implement their strategies and practices more effectively.
• Evaluate the factors that make certain countries more attractive for foreign direct investment than others.
  • Several factors influence a country's attractiveness for foreign direct investment, including political stability, economic conditions, infrastructure quality, and workforce skills. Countries that offer a stable political environment are generally seen as safer investment destinations since investors seek to minimize risks associated with sudden policy changes or unrest. Additionally, favorable economic conditions like strong market demand and efficient regulatory frameworks can further entice investors looking to expand their operations internationally.
• Assess the long-term impacts of foreign direct investment on both host countries and investing companies.
  • The long-term impacts of foreign direct investment on host countries can be significant, leading to economic growth through job creation, technology transfer, and enhanced productivity. However, it can also result in challenges like market dominance by multinational corporations or environmental concerns. For investing companies, FDI can yield benefits such as increased market share and profitability but also exposes them to risks associated with operating in unfamiliar regulatory environments. Balancing these outcomes is essential for both parties to maximize the benefits of foreign direct investment.

Related terms

Joint Venture: A business arrangement where two or more parties agree to pool their resources for a specific goal, often seen as a strategy for entering foreign markets while sharing risks.

Portfolio Investment: Investment in financial assets, such as stocks and bonds, in a foreign country without gaining significant control over those assets.

Multinational Corporation: A company that operates in multiple countries and often engages in foreign direct investment to establish subsidiaries or branches abroad.