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 by establishing business operations or acquiring assets in that country. This form of investment allows investors to have a significant degree of influence and control over the foreign business, which can lead to strategic advantages such as market access, resource acquisition, and operational efficiency. FDI is a key driver of international economic integration and can impact local economies positively through job creation and technology transfer.

5 Must Know Facts For Your Next Test

1. FDI can take various forms, including greenfield investments (new facilities), mergers and acquisitions (buying existing companies), and joint ventures.
2. Countries often compete for FDI by offering incentives such as tax breaks, subsidies, and favorable regulations to attract foreign investors.
3. FDI can significantly influence the economic development of host countries by providing capital, creating jobs, and fostering innovation through technology transfer.
4. The United States is one of the largest sources of FDI globally, while emerging markets have increasingly become attractive destinations for foreign investors.
5. Political stability, economic policies, and market size are critical factors influencing a company's decision to pursue foreign direct investment in a particular country.

Review Questions

• How does foreign direct investment influence the economic growth of host countries?
  • Foreign direct investment positively influences the economic growth of host countries by providing capital influx that can be used for infrastructure development, creating jobs which increase consumer spending, and fostering innovation through technology transfer from foreign firms. These benefits can lead to improved productivity and competitiveness within the local economy. Additionally, FDI often brings managerial expertise and best practices that can help elevate the overall business environment in the host country.
• Compare and contrast foreign direct investment with portfolio investment in terms of control and risk.
  • Foreign direct investment offers investors significant control over their operations in the host country, allowing them to influence management decisions and strategic direction. In contrast, portfolio investment involves buying financial assets without seeking control over the companies involved. While FDI carries a higher level of risk due to the commitment of resources and reliance on the local economy's stability, portfolio investments are generally considered less risky since they are more liquid and can be easily sold if conditions change.
• Evaluate the strategic motivations behind a multinational corporation's decision to engage in foreign direct investment.
  • Multinational corporations engage in foreign direct investment for several strategic reasons including seeking new markets for expansion, accessing valuable resources not available domestically, achieving economies of scale through production efficiencies, and mitigating risks associated with currency fluctuations. By establishing operations in different countries, MNCs can tailor their offerings to local preferences while also diversifying their revenue streams. This strategic approach helps them maintain competitiveness on a global scale while leveraging local advantages.

Related terms

Portfolio Investment: Portfolio investment refers to investments made in financial assets, such as stocks and bonds, where the investor does not seek to obtain control or significant influence over the companies.

Joint Venture: A joint venture is a business arrangement where two or more parties collaborate to undertake a specific project or business activity, sharing resources, risks, and profits.

Multinational Corporation (MNC): A multinational corporation (MNC) is a company that operates in multiple countries beyond its home country, often engaging in foreign direct investment to establish subsidiaries or branches.