Foreign direct investment

Definition

Foreign direct investment (FDI) refers to the investment made by a company or individual in one country in business interests or assets located in another country, often through the establishment of business operations or acquiring business assets. This type of investment is significant for economic growth as it leads to job creation, technology transfer, and improved infrastructure in the host country, thus opening up opportunities for development.

5 Must Know Facts For Your Next Test

1. FDI can be classified into two types: greenfield investments, where new operations are built from the ground up, and mergers and acquisitions, where existing businesses are purchased.
2. Countries often seek FDI to boost economic growth, as it brings capital, technology, and managerial expertise that may not be available domestically.
3. Developing countries are particularly keen on attracting FDI as it can lead to significant improvements in employment rates and infrastructure development.
4. Tax incentives and favorable regulatory environments are commonly used by governments to attract foreign investors and stimulate FDI inflows.
5. FDI can sometimes lead to concerns about foreign control over local resources and industries, leading to debates about economic sovereignty and national interests.

Review Questions

• How does foreign direct investment influence economic growth in host countries?
  • Foreign direct investment significantly influences economic growth in host countries by providing essential capital for development projects, creating jobs, and introducing advanced technologies. These investments often enhance local industries through improved processes and skills transfer. As foreign companies establish operations, they can also stimulate competition, driving domestic firms to innovate and improve their efficiency.
• What are some advantages and disadvantages of foreign direct investment for both investors and host countries?
  • Advantages of foreign direct investment for investors include access to new markets, lower labor costs, and diversification of their business portfolio. For host countries, benefits include job creation, enhanced infrastructure, and technology transfer. However, disadvantages can arise; investors may prioritize profit over local development needs, while host countries may face challenges like loss of local control over resources and potential exploitation of labor.
• Evaluate the impact of foreign direct investment on economic globalization and local economies.
  • Foreign direct investment plays a crucial role in accelerating economic globalization by facilitating the flow of capital across borders and integrating national markets. This influx of foreign capital can spur local economies through job creation and infrastructure improvements. However, this dynamic also raises concerns about economic dependence on foreign entities and potential cultural homogenization as global companies exert influence over local practices. Balancing these effects is vital for sustainable economic development.

Related terms

multinational corporation: A multinational corporation is a company that operates in multiple countries, managing production or delivering services in more than one nation.

portfolio investment: Portfolio investment involves investing in financial assets like stocks and bonds in foreign countries but does not confer direct control over the companies in which the investments are made.

economic globalization: Economic globalization is the increasing interdependence of national economies through trade, investment, and capital flows, resulting in the integration of markets across the globe.