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 acquiring assets or establishing business operations. FDI is crucial for emerging markets as it brings capital, technology, and expertise, helping to foster economic growth and development in destinations that may lack domestic resources.

5 Must Know Facts For Your Next Test

1. FDI is vital for emerging markets as it provides much-needed capital that can be used for infrastructure projects, job creation, and enhancing local industries.
2. Countries with favorable regulatory environments and incentives often attract more FDI, as foreign investors seek stable and predictable investment conditions.
3. FDI can lead to technology transfer, allowing local firms to benefit from advanced practices and innovations introduced by foreign companies.
4. Emerging markets are increasingly becoming attractive destinations for FDI due to their growing consumer markets and potential for high returns on investment.
5. The presence of foreign direct investments can stimulate competition within the local market, encouraging domestic businesses to innovate and improve their efficiency.

Review Questions

• How does foreign direct investment impact economic growth in emerging markets?
  • Foreign direct investment significantly impacts economic growth in emerging markets by injecting capital that can be used for infrastructure improvements and business development. It creates jobs and enhances productivity through the introduction of new technologies and best practices from foreign investors. Additionally, FDI helps integrate these markets into the global economy, boosting trade and attracting more investments over time.
• What are the main factors that influence a country's ability to attract foreign direct investment?
  • Several factors influence a country's ability to attract foreign direct investment, including political stability, regulatory frameworks, infrastructure quality, and access to skilled labor. Countries with clear laws that protect investors' rights and provide incentives for FDI tend to see higher levels of investment. Additionally, having developed infrastructure and a skilled workforce makes a country more appealing to foreign investors seeking efficiency and reliability in operations.
• Evaluate the long-term implications of foreign direct investment on local businesses in emerging markets.
  • The long-term implications of foreign direct investment on local businesses in emerging markets can be profound. While FDI may initially pose competitive pressures on local firms, it also provides opportunities for collaboration, learning, and growth. Local businesses can benefit from improved access to capital and technology through partnerships with foreign investors. However, if not managed properly, there could be risks of market monopolization by foreign entities, potentially stifling local entrepreneurship if domestic firms are unable to compete effectively.

Related terms

multinational corporation: A multinational corporation (MNC) is a company that operates in multiple countries, often investing directly in foreign markets to establish production facilities or sales offices.

portfolio investment: Portfolio investment involves investing in financial assets such as stocks and bonds in foreign countries, which differs from FDI as it does not involve acquiring control over the companies.

economic development: Economic development refers to the progress in an economy's overall health and well-being, often measured by indicators such as GDP growth, employment rates, and improvements in living standards.