Foreign direct investment (FDI)

Definition

Foreign direct investment (FDI) refers to an investment made by a company or individual in one country into business interests located in another country, typically by acquiring assets or establishing business operations. FDI often involves a long-term interest in and significant influence over the foreign business, distinguishing it from other forms of investment such as portfolio investment. This type of investment can play a crucial role in promoting economic development, enhancing global integration, and facilitating technology transfer between countries.

5 Must Know Facts For Your Next Test

1. FDI can take various forms, including establishing a new operation (greenfield investment), acquiring an existing company (brownfield investment), or forming joint ventures with local firms.
2. Countries that actively promote FDI often create favorable policies, such as tax incentives and deregulation, to attract foreign investors.
3. FDI is often seen as a way to stimulate economic growth in host countries by creating jobs, increasing capital inflows, and fostering technological advancements.
4. The growth of global supply chains has significantly increased the role of FDI, as companies seek to optimize production by investing in different regions of the world.
5. Political stability and strong legal frameworks in host countries are critical factors that influence the level of FDI they receive.

Review Questions

• How does foreign direct investment contribute to regional integration efforts among countries?
  • Foreign direct investment is a significant driver of regional integration as it facilitates the movement of capital, technology, and expertise across borders. When countries engage in FDI, they not only enhance their economic ties but also promote collaboration and interdependence among member states. This integration can lead to more stable economic environments and increased competitiveness in the global market, further reinforcing the benefits of regional partnerships.
• Discuss the potential risks and benefits of foreign direct investment for both home and host countries.
  • Foreign direct investment presents various risks and benefits for both home and host countries. For host countries, the benefits include job creation, infrastructure development, and increased access to technology. However, risks may involve economic dependency on foreign firms and potential negative impacts on local businesses. Conversely, home countries benefit from increased profits and market access but face risks such as capital flight and loss of domestic jobs if companies relocate operations abroad.
• Evaluate the implications of foreign direct investment on global economic inequality and development disparities among nations.
  • Foreign direct investment can have complex implications for global economic inequality and development disparities. While FDI can promote growth in emerging markets by providing essential capital and technology, it can also lead to uneven development if investments are concentrated in specific sectors or regions. This concentration may exacerbate inequalities within countries as certain areas benefit more than others. Additionally, if wealth generated from FDI primarily flows back to the investor's home country, it can hinder local economic development efforts, making it essential for policymakers to create inclusive strategies that ensure equitable distribution of the benefits associated with FDI.

Related terms

Multinational Corporation (MNC): A corporation that has its facilities and other assets in at least one country other than its home country, often engaging in FDI to establish operations abroad.

Economic Integration: The process by which countries reduce trade barriers and increase economic cooperation, often facilitating greater FDI flows among member states.

Joint Venture: A business arrangement where two or more parties agree to pool their resources for a specific project or business activity, often used as a strategy for FDI.