Foreign direct investment

Definition

Foreign direct investment (FDI) occurs when an individual or business from one country invests in assets or operations in another country, typically through establishing business operations or acquiring assets in the foreign nation. This type of investment is crucial as it connects economies globally, influences currency markets, and can drive economic development in host countries by creating jobs and enhancing technology transfer.

5 Must Know Facts For Your Next Test

1. FDI can take the form of establishing new operations (greenfield investment) or acquiring existing businesses (brownfield investment).
2. Countries often offer incentives for foreign direct investment, such as tax breaks or reduced regulations, to attract foreign capital.
3. FDI plays a significant role in globalization, as it facilitates the integration of global economies through cross-border investments.
4. The flow of FDI is influenced by various factors including political stability, market size, labor costs, and existing infrastructure.
5. Foreign direct investment can lead to economic development in host countries by providing capital, creating jobs, and enabling technology transfer.

Review Questions

• How does foreign direct investment influence currency markets and international capital flows?
  • Foreign direct investment affects currency markets by altering demand for currencies based on where investments are made. When investors inject capital into a foreign country, it increases demand for that country’s currency, which can appreciate its value. This relationship also impacts international capital flows as FDI represents a long-term commitment to invest in the economy of another country, influencing overall capital movement between nations.
• Discuss how foreign direct investment serves as a measure of economic development and what determinants contribute to its flow into countries.
  • Foreign direct investment is often used as an indicator of economic development since higher levels of FDI usually signify an attractive business environment and potential for growth. Determinants such as political stability, robust legal frameworks, access to markets, skilled labor forces, and favorable economic conditions all contribute to attracting FDI. Countries with these favorable conditions tend to experience enhanced growth opportunities as foreign firms bring capital and expertise.
• Evaluate the impact of globalization on foreign direct investment trends and how this shapes the economic landscape of developing nations.
  • Globalization has significantly accelerated trends in foreign direct investment by breaking down barriers to trade and promoting cross-border business operations. This has shaped the economic landscape of developing nations by providing access to foreign capital and technology. As multinational corporations expand into these regions through FDI, they can boost local economies by creating jobs and improving infrastructure. However, it also raises concerns about potential exploitation and dependence on foreign entities, necessitating careful policy considerations by host countries.

Related terms

Portfolio Investment: Investment in financial assets, such as stocks and bonds, where the investor does not seek direct control over the assets.

Multinational Corporation: A company that operates in multiple countries, often engaging in foreign direct investment to establish a presence in international markets.

Capital Account: A component of a country's balance of payments that records all transactions involving the purchase or sale of assets.