Foreign direct investment (FDI)

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 through establishing business operations or acquiring assets. This kind of investment is crucial for countries looking to stimulate economic growth, create jobs, and enhance technological transfer. FDI can also be influenced by global financial conditions and government policies that either encourage or restrict such investments.

5 Must Know Facts For Your Next Test

1. FDI can take many forms, including greenfield investments (building new operations) and mergers and acquisitions (buying existing businesses).
2. The flow of FDI can be volatile and is heavily influenced by global economic conditions, political stability, and changes in government policy.
3. Countries often compete to attract FDI through tax incentives, grants, and other favorable policies to boost their economies.
4. FDI plays a significant role in transferring technology and skills between countries, which can lead to improved productivity and innovation.
5. Global financial crises can lead to a decline in FDI as companies become more risk-averse and focus on domestic markets.

Review Questions

• How does foreign direct investment contribute to economic growth in host countries?
  • Foreign direct investment contributes to economic growth in host countries by creating jobs, increasing capital inflows, and improving infrastructure. When foreign companies invest locally, they often bring new technologies and expertise, which can enhance productivity and innovation. Additionally, FDI can lead to better integration into global supply chains, helping local businesses access larger markets.
• Discuss the impact of government policies on foreign direct investment and how these policies can either facilitate or hinder investment flows.
  • Government policies significantly influence foreign direct investment by creating an environment that either encourages or deters investors. Policies such as tax incentives, streamlined regulations, and protections for foreign investors can facilitate FDI by making it more attractive. Conversely, restrictive measures like high tariffs, stringent ownership rules, or political instability can hinder investment flows, leading potential investors to seek opportunities in more favorable environments.
• Evaluate the effects of global financial crises on foreign direct investment patterns and the subsequent implications for international business.
  • Global financial crises typically lead to a decline in foreign direct investment as companies reassess risk and prioritize domestic operations over international expansion. This reduction in FDI can have profound implications for international business, including slowed economic growth in developing countries reliant on foreign capital. Additionally, it may disrupt global supply chains and innovation processes as multinational corporations scale back their international commitments during periods of economic uncertainty.

Related terms

Portfolio Investment: A form of investment where an individual or institutional investor purchases securities in another country without the intent of controlling the business.

Multinational Corporation: A company that operates in multiple countries, often engaging in foreign direct investment to establish a presence in different markets.

Economic Development:

The process of improving the economic well-being and quality of life for a community or nation, often influenced by FDI through job creation and infrastructure development.