Foreign direct investment

Definition

Foreign direct investment (FDI) refers to an investment made by a company or individual in one country into business interests located in another country. This type of investment often involves establishing business operations or acquiring assets in the foreign country, providing not just capital but also management expertise and technology. FDI is crucial for economic growth, allowing for the transfer of resources and knowledge across borders, which can lead to job creation and increased productivity in the host country.

5 Must Know Facts For Your Next Test

1. FDI can take various forms, including establishing new operations (greenfield investments), merging with or acquiring existing local firms, or expanding existing operations.
2. Countries actively seek foreign direct investment as it can lead to technology transfer, improved infrastructure, and overall economic development.
3. FDI is influenced by factors such as market size, labor costs, political stability, and regulatory environment of the host country.
4. Emerging markets have become increasingly attractive for FDI due to their rapid economic growth and potential for high returns on investment.
5. Foreign direct investment can also have drawbacks, including potential negative impacts on local businesses and concerns about foreign control over strategic industries.

Review Questions

• How does foreign direct investment differ from portfolio investment, and what are the implications of these differences for host countries?
  • Foreign direct investment differs from portfolio investment primarily in that FDI involves a long-term commitment and active management in the host country, whereas portfolio investment focuses on acquiring financial assets without significant control. For host countries, FDI can lead to job creation, transfer of technology, and enhanced skills among the local workforce. In contrast, portfolio investments may provide capital but lack the deeper economic integration and benefits that come from FDI.
• Discuss the key factors that influence a multinational corporation's decision to pursue foreign direct investment in a specific host country.
  • Multinational corporations consider several key factors when deciding to pursue foreign direct investment in a specific host country. These factors include the size of the market, potential for growth, availability of skilled labor, cost of doing business, political stability, and regulatory environment. A favorable combination of these elements can make a host country attractive for FDI as companies seek to maximize their return on investment while minimizing risks.
• Evaluate the potential positive and negative impacts of foreign direct investment on local economies and businesses in host countries.
  • The impact of foreign direct investment on local economies can be both positive and negative. On one hand, FDI can stimulate economic growth through job creation, technology transfer, and increased competition that benefits consumers. It can also enhance infrastructure development and productivity. On the other hand, negative impacts may include local businesses struggling to compete against larger multinational corporations, potential exploitation of resources without fair compensation, and concerns over loss of national sovereignty if foreign entities control key industries. Balancing these effects is crucial for sustainable economic development in host countries.

Related terms

Portfolio Investment: Investment in financial assets such as stocks and bonds in a foreign country, without direct control over the companies.

Multinational Corporation: A company that operates in multiple countries, often engaging in foreign direct investment to establish production or service facilities abroad.

Host Country: The country in which foreign direct investment is made, where the foreign company sets up operations or acquires assets.