Foreign Direct Investment

Definition

Foreign direct investment (FDI) refers to the investment made by an entity or individual from one country into business interests located in another country. This investment typically involves the acquisition of a controlling stake or the establishment of operations in the foreign market.

5 Must Know Facts For Your Next Test

1. FDI allows companies to access new markets, resources, and capabilities, often leading to increased efficiency, productivity, and competitiveness.
2. Governments often offer incentives, such as tax breaks or infrastructure support, to attract FDI as it can bring economic growth, job creation, and technology transfer to the host country.
3. FDI can take the form of greenfield investments, where a company builds new facilities in the host country, or mergers and acquisitions, where a company buys an existing local business.
4. The level of FDI in a country is often used as an indicator of its economic health and attractiveness to foreign investors.
5. Factors that influence a company's decision to pursue FDI include market size, labor costs, political and economic stability, infrastructure, and the regulatory environment in the host country.

Review Questions

• Explain how foreign direct investment relates to the concept of the global market and the advantages of international trade.
  • Foreign direct investment (FDI) is a key component of the global market and international trade. By investing directly in operations in foreign countries, companies can access new markets, resources, and capabilities that may not be available in their home country. This allows them to take advantage of the benefits of international trade, such as economies of scale, comparative advantages, and diversification of risks. FDI also facilitates the integration of countries into the global value chain, as multinational corporations establish production and distribution networks across borders.
• Describe how the assessment of global markets for opportunities is related to foreign direct investment decisions.
  • When evaluating global markets for investment opportunities, companies will assess the potential of a foreign market to determine if it is a suitable location for FDI. This assessment includes factors such as market size, growth potential, labor and production costs, infrastructure, political and economic stability, and the regulatory environment. Companies will weigh these factors to identify markets that offer the best opportunities for expansion, resource acquisition, and cost-effective production. The outcome of this assessment will heavily influence the company's decision to pursue FDI in a particular country or region.
• Analyze how the process of entering the global arena is impacted by a company's approach to foreign direct investment.
  • A company's strategy for entering the global arena is closely tied to its approach to foreign direct investment. FDI can be a key mechanism for a company to establish a presence in a new market, whether through greenfield investments, mergers and acquisitions, or joint ventures. The mode of entry, the level of control, and the pace of expansion are all influenced by the company's FDI decisions. For example, a company may start with a small-scale FDI project to test the market, then gradually increase its investment and commitment as it gains experience and confidence in the new environment. Alternatively, a company may pursue a more aggressive FDI strategy to rapidly gain a dominant position in a foreign market. The company's approach to FDI is a critical factor in determining the success and pace of its global expansion.

Related terms

Multinational Corporation: A large company that has operations and assets in multiple countries, often through subsidiaries or joint ventures.

Global Value Chain:

The interconnected network of activities and actors involved in the production and distribution of a product or service across multiple countries.

Host Country: The country that receives the foreign direct investment, providing the location and resources for the investment project.