Foreign direct investment

Definition

Foreign direct investment (FDI) is a type of investment where an individual or business from one country makes an investment in a business located in another country, often by acquiring a significant degree of influence or control over that business. This investment can take various forms, such as establishing new operations, expanding existing ones, or acquiring foreign companies, and it plays a vital role in economic growth and industrial diversification by fostering technology transfer, creating jobs, and increasing competition.

5 Must Know Facts For Your Next Test

1. Foreign direct investment is crucial for developing economies as it provides capital for infrastructure projects and stimulates industrial growth.
2. FDI can lead to technology transfer, where foreign companies introduce advanced technologies and practices to local businesses, enhancing productivity.
3. Countries often offer incentives such as tax breaks or reduced regulations to attract foreign direct investments, aiming to boost their local economies.
4. The presence of foreign firms through FDI can increase competition in the local market, leading to improved products and services for consumers.
5. Foreign direct investments are often measured by the amount of capital invested, the number of jobs created, and the overall impact on the local economy.

Review Questions

• How does foreign direct investment contribute to economic development and industrial diversification?
  • Foreign direct investment plays a significant role in economic development by injecting capital into local economies, which can lead to the creation of new jobs and the establishment of new businesses. It also facilitates industrial diversification as foreign companies often bring different technologies and practices that enhance the local industry's capabilities. This infusion of resources can help countries move away from reliance on a single industry and promote a more varied economic structure.
• What strategies do countries use to attract foreign direct investment, and how effective are these strategies?
  • Countries typically use strategies like offering tax incentives, simplifying regulations, and improving infrastructure to attract foreign direct investment. These strategies can be quite effective as they create a more favorable business environment that encourages foreign companies to invest. By addressing potential investors' concerns about operating conditions and costs, countries can successfully draw in FDI which is essential for their economic growth.
• Evaluate the long-term impacts of foreign direct investment on local industries and the economy as a whole.
  • The long-term impacts of foreign direct investment on local industries can be profound. While FDI can lead to immediate job creation and economic stimulus, its effects may evolve over time. Increased competition from foreign firms can push local companies to innovate and improve efficiency. Additionally, sustained FDI often results in higher standards for corporate governance and environmental practices. However, there can also be drawbacks if local firms struggle to compete with larger multinational corporations or if profits are repatriated rather than reinvested locally. Overall, FDI can drive substantial growth but must be managed carefully to maximize benefits for the local economy.

Related terms

Multinational Corporation: A company that operates in multiple countries, often making significant foreign direct investments to establish and manage operations worldwide.

Portfolio Investment: An investment in financial assets, such as stocks and bonds, in a foreign country that does not grant significant control over the companies involved.

Economic Development: The process by which a country improves the economic, political, and social well-being of its people, often supported by foreign direct investments.