Foreign direct investment

Definition

Foreign direct investment (FDI) refers to 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 significant role in global trade dynamics, especially in emerging markets where it can drive economic growth, create jobs, and enhance technological transfer.

5 Must Know Facts For Your Next Test

1. Foreign direct investment can take the form of establishing new businesses, merging with local companies, or acquiring existing firms in the target country.
2. Emerging markets are particularly attractive for foreign direct investment due to their potential for high returns and rapid economic growth.
3. FDI can lead to the transfer of technology and skills from foreign companies to local businesses, enhancing productivity and innovation.
4. Government policies and incentives often influence the flow of foreign direct investment by either encouraging or discouraging foreign companies from entering a market.
5. Foreign direct investment contributes to globalization by facilitating cross-border business operations and economic integration between nations.

Review Questions

• How does foreign direct investment impact emerging markets?
  • Foreign direct investment significantly impacts emerging markets by stimulating economic growth and creating job opportunities. It often brings new technologies and practices that improve local industries' efficiency. Additionally, FDI can help develop infrastructure, which is crucial for supporting further economic activities and attracting more investments.
• Discuss the challenges that countries face when attracting foreign direct investment and how these challenges can be overcome.
  • Countries looking to attract foreign direct investment face challenges such as political instability, inadequate infrastructure, and restrictive regulatory environments. To overcome these challenges, governments can implement reforms to improve the business climate, invest in infrastructure development, and create incentives that make their market more attractive to foreign investors. Building a reputation for stability and transparency also helps attract more FDI.
• Evaluate the long-term effects of foreign direct investment on a host country's economy and its implications for global trade patterns.
  • The long-term effects of foreign direct investment on a host country's economy can be profound, leading to sustainable economic development, improved living standards, and increased competitiveness in global markets. FDI helps integrate the host country into global trade networks by enhancing its capacity for production and export. As emerging markets become increasingly reliant on FDI for growth, they also alter traditional trade patterns by shifting manufacturing bases and influencing supply chains worldwide.

Related terms

Multinational Corporation: A company that operates in multiple countries, often engaging in foreign direct investment to establish subsidiaries or joint ventures abroad.

Portfolio Investment: Investment in financial assets such as stocks and bonds in a foreign country, as opposed to direct control over business operations.

Economic Development: The progress in an economy that often results from foreign direct investment, characterized by improvements in standards of living, infrastructure, and employment opportunities.