Foreign direct investment

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. This type of investment is a crucial component of international business as it enables companies to expand their operations globally, access new markets, and capitalize on local resources and expertise.

5 Must Know Facts For Your Next Test

1. FDI can take the form of establishing new operations (greenfield investments) or acquiring existing businesses (brownfield investments).
2. Countries often encourage FDI through tax incentives, subsidies, and favorable regulatory frameworks to attract foreign capital.
3. FDI plays a vital role in economic development by bringing in capital, technology, and expertise that can spur growth in the host country.
4. While FDI can create jobs and boost economic activity, it may also pose risks such as market monopolization and displacement of local businesses.
5. Emerging markets often attract significant FDI due to their potential for high returns and access to untapped resources and consumer bases.

Review Questions

• How does foreign direct investment impact the global business landscape and the operations of multinational corporations?
  • Foreign direct investment significantly shapes the global business landscape by allowing multinational corporations to establish operations across various countries. This expansion enables them to optimize production processes, tap into new markets, and access local resources. Furthermore, FDI enhances competitive advantages by facilitating technology transfer and innovation, leading to more efficient business practices and increased profitability for MNCs.
• Evaluate the role of foreign direct investment as a driver of globalization in recent years.
  • Foreign direct investment has been a major driver of globalization by fostering interconnectedness between economies worldwide. As companies seek growth opportunities beyond their domestic markets, FDI facilitates cross-border transactions, knowledge sharing, and cultural exchanges. This increased economic interdependence not only boosts trade but also promotes the movement of labor and capital across borders, contributing to a more integrated global economy.
• Assess the opportunities and risks associated with foreign direct investment in emerging markets.
  • Foreign direct investment in emerging markets presents numerous opportunities, such as access to growing consumer bases, lower production costs, and the potential for higher returns on investment. However, it also carries risks like political instability, regulatory challenges, and cultural differences that can affect business operations. Companies must conduct thorough risk assessments and adopt strategies to mitigate these risks while maximizing the benefits of entering these dynamic markets.

Related terms

Multinational Corporation: A multinational corporation (MNC) is a company that has facilities and other assets in at least one country other than its home country, operating on a global scale.

Joint Venture: A joint venture is a business arrangement in which two or more parties agree to pool their resources for a specific project or business activity while retaining their separate legal identities.

Portfolio Investment: Portfolio investment involves the purchase of financial assets such as stocks and bonds in foreign companies, without seeking significant control over those companies, unlike FDI.