Foreign Direct Investment

Definition

Foreign direct investment (FDI) refers to the investment made by an individual or company from one country into business interests located in another country. This type of investment involves the acquisition of foreign assets with the intent of controlling or influencing the management of the foreign entity. FDI is a crucial component of global trade and economic integration, as it allows companies to expand their operations internationally and access new markets and resources.

5 Must Know Facts For Your Next Test

1. Foreign direct investment can take the form of establishing a new business, acquiring an existing one, or expanding the operations of an existing foreign affiliate.
2. FDI is often driven by factors such as access to new markets, lower production costs, and the acquisition of strategic assets like technology, intellectual property, or skilled labor.
3. Multinational corporations are the primary drivers of foreign direct investment, as they seek to expand their global reach and capitalize on opportunities in different countries.
4. FDI can have both positive and negative impacts on the host country, including job creation, technology transfer, and increased competition, as well as potential displacement of local businesses and concerns about labor and environmental standards.
5. Governments often use policies such as tax incentives, investment protection agreements, and infrastructure development to attract foreign direct investment and promote economic growth.

Review Questions

• Explain how foreign direct investment relates to global trade in the United States.
  • Foreign direct investment plays a significant role in global trade for the United States. As a major recipient of FDI, the U.S. benefits from the capital, technology, and expertise that foreign companies bring when they invest in American businesses and operations. This investment helps to expand U.S. exports, create jobs, and enhance the country's competitiveness in the global marketplace. At the same time, U.S. companies also engage in outward FDI, investing in foreign markets to access new customers and resources, further integrating the U.S. economy with the global economy.
• Describe how foreign direct investment relates to the reasons why nations trade.
  • Foreign direct investment is closely linked to the reasons why nations engage in international trade. FDI allows companies to access new markets, resources, and capabilities that may not be available in their home countries. This can lead to increased specialization, economies of scale, and comparative advantages, which are all key drivers of trade between nations. Additionally, FDI can facilitate the transfer of technology, knowledge, and best practices, further enhancing a country's ability to participate in global trade and compete in international markets.
• Analyze the impact of multinational corporations and foreign direct investment on the global marketplace.
  • Multinational corporations, through their foreign direct investments, have a significant impact on the global marketplace. MNCs can leverage their size, resources, and access to capital to dominate industries and shape the competitive landscape in host countries. FDI by MNCs can lead to increased competition, technology transfer, and productivity gains, but it can also disrupt local businesses and raise concerns about labor standards and environmental regulations. The growing influence of MNCs and FDI has contributed to trends in global competition, such as the rise of emerging markets, the increasing importance of intangible assets, and the need for governments to balance attracting investment with protecting domestic interests.

Related terms

Multinational Corporation:

A multinational corporation (MNC) is a large company that has operations and assets in at least one country other than its home country, often through foreign direct investment.

Portfolio Investment: Portfolio investment refers to the acquisition of securities, such as stocks or bonds, in a foreign country with the intent of earning a return on the investment, rather than controlling the management of the foreign entity.

Economic Globalization: Economic globalization is the process of increased economic integration and interdependence among countries, facilitated by the flow of goods, services, capital, and labor across international borders, including through foreign direct investment.