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 assets. This type of investment allows investors to have a significant degree of control over their foreign business activities, influencing how resources are allocated and how profits are generated. FDI plays a critical role in international trade and globalization, facilitating cross-border economic activities and contributing to economic growth in both the investor's and host countries.

5 Must Know Facts For Your Next Test

1. FDI can take various forms, including mergers and acquisitions, joint ventures, and the establishment of new business operations.
2. Countries often incentivize foreign direct investment through tax breaks, subsidies, and improved infrastructure to attract investors.
3. FDI can lead to technology transfer and skill development in host countries, which can stimulate local economic growth.
4. The flow of FDI can be influenced by political stability, market size, and labor costs in the host country.
5. Developing countries often seek foreign direct investment to boost their economies, create jobs, and enhance industrial capacity.

Review Questions

• How does foreign direct investment contribute to the economic development of host countries?
  • Foreign direct investment contributes to the economic development of host countries by providing capital, creating jobs, and facilitating technology transfer. When foreign companies invest in local businesses or establish new operations, they bring financial resources that can stimulate local economies. Additionally, these investments often lead to the development of infrastructure and enhance workforce skills through training programs, which can have long-term benefits for economic growth.
• Compare and contrast foreign direct investment with portfolio investment, highlighting their different impacts on host economies.
  • Foreign direct investment involves a significant degree of control over foreign business operations and is generally aimed at establishing a long-term presence in a host country. In contrast, portfolio investment is focused on acquiring financial assets without seeking control over companies. While FDI can lead to substantial benefits for host economies such as job creation and technology transfer, portfolio investment might not have the same impact since it often entails short-term financial gains rather than active engagement with local markets.
• Evaluate the implications of foreign direct investment for global economic relationships and power dynamics among nations.
  • Foreign direct investment has significant implications for global economic relationships by reshaping power dynamics among nations. Countries that are major sources of FDI often wield greater influence over global markets and can dictate terms that benefit their interests. Conversely, nations that attract substantial FDI may gain leverage by providing access to resources or markets. This relationship fosters interdependence; however, it can also lead to tensions if there are perceived inequities or exploitation in how investments are managed between developed and developing nations.

Related terms

multinational corporation: A multinational corporation (MNC) is a company that has business operations in multiple countries, often engaging in foreign direct investment to expand its global reach.

portfolio investment: Portfolio investment involves investing in financial assets such as stocks and bonds in a foreign country without the intention of acquiring significant control over the companies.

economic globalization:

Economic globalization refers to the increasing interdependence of national economies around the world through trade, investment, and capital flows, significantly influenced by foreign direct investment.