Foreign direct investment

Definition

Foreign direct investment (FDI) refers to the investment made by a company or individual in one country in business interests located in another country. This can involve establishing business operations, acquiring assets, or expanding existing operations in a foreign market. FDI is crucial as it often provides access to new markets and resources, and can significantly influence international business strategies and economic growth.

5 Must Know Facts For Your Next Test

1. FDI can take many forms, including greenfield investments (new facilities), mergers and acquisitions (buying existing businesses), and joint ventures with local firms.
2. Tax treaties between countries can significantly affect the flow of FDI by reducing withholding taxes on dividends, interest, and royalties.
3. Countries often compete for FDI through incentives like tax breaks, subsidies, and relaxed regulations to attract foreign investors.
4. FDI can lead to technology transfer and skills development in the host country, contributing to economic growth and job creation.
5. Political stability and economic policies of a country are major determinants of FDI, as investors seek environments that minimize risks.

Review Questions

• How does foreign direct investment influence business strategies for multinational corporations?
  • Foreign direct investment plays a critical role in shaping the business strategies of multinational corporations by providing access to new markets and resources. MNCs can leverage FDI to gain competitive advantages such as local market knowledge and operational efficiencies. Additionally, FDI allows companies to diversify their investments and reduce reliance on their home market, leading to more resilient business strategies.
• Discuss how tax treaties between countries can impact foreign direct investment decisions.
  • Tax treaties are agreements between two or more countries that help avoid double taxation on income generated across borders. These treaties can incentivize foreign direct investment by lowering the effective tax rate on dividends, royalties, and interest payments. By making it more financially attractive for companies to invest abroad, tax treaties facilitate increased cross-border investments, ultimately impacting global business dynamics.
• Evaluate the long-term effects of foreign direct investment on economic development in host countries.
  • The long-term effects of foreign direct investment on economic development in host countries can be significant. FDI often leads to capital inflow, which can enhance infrastructure and create jobs. Furthermore, it can stimulate technology transfer and knowledge sharing, elevating the skill set of the local workforce. However, there may also be challenges such as potential market monopolization by foreign firms or environmental concerns that need to be managed for sustainable growth.

Related terms

Portfolio Investment: Portfolio investment involves investing in financial assets such as stocks and bonds in a foreign country without the intent of controlling the business.

Multinational Corporation: A multinational corporation (MNC) is a company that has facilities and assets in at least one country other than its home country, engaging in foreign direct investment to operate globally.

Joint Venture: A joint venture is a business arrangement where two or more parties agree to pool their resources for a specific project or business activity, often used in FDI to mitigate risks.