Foreign direct investment

Definition

Foreign direct investment (FDI) refers to the investment made by a company or individual in one country into business interests located in another country, typically involving the establishment or expansion of business operations. FDI is crucial as it provides firms with the opportunity to gain access to new markets, resources, and technologies, while also increasing economic activity in the host country. This type of investment can significantly influence financing strategies, expose companies to economic risks, and affect ownership and control structures in international business.

5 Must Know Facts For Your Next Test

1. FDI can take several forms, including establishing new business facilities, acquiring existing businesses, or forming joint ventures.
2. Countries often encourage FDI through favorable tax policies, incentives, and reduced barriers to entry to attract foreign investors.
3. FDI can lead to job creation and technology transfer in the host country, positively impacting its economic development.
4. It is important for companies to assess political and economic stability before making FDI decisions, as these factors can significantly impact their investments.
5. Foreign direct investment can sometimes lead to conflicts over control and management between foreign investors and local stakeholders.

Review Questions

• How does foreign direct investment impact the financing strategies of companies operating internationally?
  • Foreign direct investment can significantly influence financing strategies by providing access to local capital markets and reducing dependency on domestic funding sources. When a company invests directly in a foreign market, it may leverage local resources, infrastructure, and partnerships that can enhance financial performance. Additionally, FDI can improve creditworthiness in the host country, allowing companies to secure better financing terms and opportunities for future expansions.
• Discuss the economic risks associated with foreign direct investment and how they affect decision-making for businesses.
  • Economic risks associated with foreign direct investment include currency fluctuations, changes in local market demand, political instability, and regulatory changes that could affect profitability. These risks can significantly impact a company's decision-making process, as they may require comprehensive risk assessments and contingency planning before investing. Businesses often need to analyze potential economic conditions and prepare for various scenarios that could jeopardize their investments.
• Evaluate the implications of foreign direct investment on ownership and control structures within multinational enterprises.
  • Foreign direct investment has profound implications on ownership and control structures within multinational enterprises. As companies expand internationally through FDI, they often need to adapt their governance models to align with local regulations and cultural expectations. This may lead to hybrid structures where ownership is shared between foreign investors and local partners, potentially diluting control. Companies must navigate these complexities carefully to ensure effective management while respecting local stakeholder interests.

Related terms

Portfolio Investment: Investment in financial assets such as stocks and bonds that does not provide the investor with significant control over the companies.

Multinational Corporation: A corporation that manages production or delivers services in more than one country, often utilizing foreign direct investment.

Joint Venture:

A business arrangement where two or more parties agree to pool their resources for a specific project or business activity, often used in conjunction with foreign direct investment.