Foreign direct investment

Definition

Foreign direct investment (FDI) refers to the investment made by a company or individual in one country in business interests in another country, typically by establishing business operations or acquiring business assets. FDI is significant as it involves not just a transfer of capital but also a commitment to engage in the host country's economy, potentially influencing local employment, technology transfer, and economic development.

5 Must Know Facts For Your Next Test

1. FDI can take two main forms: greenfield investments, where a company builds new facilities from the ground up, and brownfield investments, where a company acquires or leases existing facilities.
2. Countries often seek to attract FDI through incentives such as tax breaks, grants, and improved infrastructure, viewing it as a key driver of economic growth.
3. FDI has implications for labor markets in host countries, as it can lead to job creation but may also result in wage disparities and exploitative practices.
4. The flow of FDI can be influenced by political stability, economic policies, and regulatory environments in both home and host countries.
5. Trends in FDI have shifted in recent years due to factors like technological advancement, shifts in global supply chains, and changing consumer preferences.

Review Questions

• How does foreign direct investment impact local economies in host countries?
  • Foreign direct investment significantly impacts local economies by creating jobs, enhancing technological transfer, and stimulating economic growth. When foreign companies invest in local businesses or set up new operations, they often bring new skills and technologies that can improve productivity. However, the effects can vary; while some regions may see substantial benefits, others may experience negative consequences such as job displacement or increased inequality.
• Evaluate the strategies that countries use to attract foreign direct investment and their effectiveness.
  • Countries employ various strategies to attract foreign direct investment, including offering tax incentives, improving infrastructure, and ensuring a stable political climate. While these strategies can effectively lure foreign investors, their success often depends on broader economic conditions and the overall investment climate. Countries that combine attractive incentives with a skilled workforce and strong legal frameworks tend to experience higher levels of FDI.
• Assess the long-term implications of foreign direct investment on global economic structures and power dynamics.
  • The long-term implications of foreign direct investment on global economic structures are profound as they contribute to shifting power dynamics between countries. As multinational corporations expand their operations internationally through FDI, they can influence local policies and economies significantly. This can lead to a concentration of economic power among a few large corporations, affecting smaller domestic firms and altering traditional trade relationships. Additionally, as emerging economies attract more FDI, they may gain greater influence in global markets, further reshaping international economic hierarchies.

Related terms

Multinational Corporation: A multinational corporation (MNC) is a company that operates in multiple countries, often managing production or delivering services from facilities located around the globe.

Portfolio Investment: Portfolio investment involves purchasing stocks and bonds in foreign companies or markets, which does not provide the investor with direct control over the companies.

Economic Globalization: Economic globalization refers to the increasing interdependence and integration of national economies through trade, investment, and capital flows.