Foreign Direct Investment

Definition

Foreign direct investment (FDI) refers to the investment made by an individual or company in one country into business interests located in another country. This type of investment involves establishing ownership or controlling interest in a foreign enterprise, rather than simply investing in its securities.

5 Must Know Facts For Your Next Test

1. Foreign direct investment is a key driver of international economic integration, as it allows companies to access new markets and resources, as well as spread operational risks.
2. FDI can take the form of establishing new operations, acquiring or merging with existing companies, or expanding the operations of an existing foreign-owned business.
3. Multinational corporations are the primary agents of foreign direct investment, as they seek to leverage their competitive advantages by expanding their operations globally.
4. Governments often actively compete to attract FDI, as it can bring economic benefits such as job creation, technology transfer, and increased exports.
5. The growth of global markets and the need for companies to access new sources of growth and efficiency have made foreign direct investment a necessity for many businesses.

Review Questions

• Explain how foreign direct investment relates to the importance of international management.
  • Foreign direct investment is a crucial aspect of international management, as it requires companies to navigate the complexities of operating in foreign markets. Effective international management is essential for successfully executing FDI strategies, such as managing cross-cultural teams, adapting business practices to local regulations, and leveraging global resources to gain a competitive advantage. By understanding the importance of FDI, international managers can develop strategies to effectively expand their operations into new markets and capitalize on the opportunities presented by an increasingly globalized economy.
• Describe how foreign direct investment is a key strategy for expanding globally.
  • Foreign direct investment is a primary strategy for companies seeking to expand their operations globally. By establishing a physical presence in foreign markets through FDI, businesses can access new customer bases, tap into local resources and talent, and diversify their operations to mitigate risks. FDI allows companies to overcome barriers to entry, such as trade restrictions and transportation costs, and gain a more intimate understanding of local market dynamics. Additionally, FDI can facilitate the transfer of technology, knowledge, and best practices, enabling companies to enhance their competitive position in the global marketplace.
• Analyze the necessity of global markets in the context of foreign direct investment.
  • The necessity of global markets is a key driver of foreign direct investment, as companies seek to expand their reach and tap into new sources of growth beyond their domestic markets. The increasing interconnectedness of the global economy, facilitated by advancements in technology and transportation, has made it essential for businesses to consider international expansion through FDI. By investing directly in foreign markets, companies can diversify their revenue streams, access new resources and capabilities, and capitalize on differences in labor costs, tax regimes, and consumer preferences. The ability to operate in global markets through FDI has become a critical factor in maintaining competitiveness and ensuring long-term sustainability in an increasingly borderless business environment.

Related terms

Multinational Corporation (MNC): A multinational corporation is a large company that has operations or investments in multiple countries, as opposed to operating in just its country of origin.

Globalization: Globalization is the process of interaction and integration among people, companies, and governments of different nations, driven by international trade, investment, and the exchange of ideas.

Economic Interdependence: Economic interdependence is the state in which countries rely on each other for economic resources, goods, and services, creating a web of mutual reliance.