Foreign direct investment (FDI)

Definition

Foreign direct investment (FDI) refers to an investment made by a company or individual in one country in business interests in another country, typically through the establishment of business operations or the acquisition of assets. This type of investment often involves significant control over the foreign business entity and contributes to economic globalization by facilitating cross-border capital flows, technology transfer, and management expertise.

5 Must Know Facts For Your Next Test

1. FDI can take various forms, including greenfield investments, where a company builds new facilities from the ground up, and mergers and acquisitions, where companies buy existing businesses.
2. Countries often provide incentives for foreign direct investment to attract businesses, which can include tax breaks, subsidies, and improved infrastructure.
3. FDI has a significant impact on the host country's economy by creating jobs, boosting productivity, and enhancing technological capabilities.
4. The flow of FDI can be influenced by factors such as political stability, market size, labor costs, and trade policies of the host country.
5. Emerging economies have increasingly become attractive destinations for FDI due to their growth potential and expanding consumer markets.

Review Questions

• How does foreign direct investment impact the economic development of a host country?
  • Foreign direct investment positively impacts the economic development of a host country by creating jobs and increasing productivity. It brings in capital that can be used for infrastructure improvements and enhances technological capabilities through knowledge transfer. As foreign firms establish operations locally, they often train local workers and contribute to higher skill levels in the labor force, ultimately leading to sustainable economic growth.
• Evaluate the risks and benefits associated with foreign direct investment for both the investing company and the host country.
  • For investing companies, FDI offers benefits such as market access, reduced transportation costs, and diversification of operations. However, risks include political instability or unfavorable regulations in the host country. For host countries, FDI can lead to job creation and economic growth but may also result in dependence on foreign firms and potential loss of local businesses. Balancing these risks and benefits is crucial for sustainable development.
• Assess how global trends in foreign direct investment have evolved in recent years and their implications for international business strategies.
  • In recent years, global trends in foreign direct investment have shown a shift toward emerging economies as attractive destinations due to their growth potential. Companies are adapting their international business strategies by focusing on local partnerships and sustainable practices to navigate regulatory challenges. This evolution indicates a need for businesses to remain agile and culturally aware while exploring new markets. Additionally, geopolitical tensions have influenced investment decisions, making risk assessment a critical component of FDI strategies.

Related terms

Portfolio Investment: Portfolio investment involves the purchase of financial assets, such as stocks and bonds, in a foreign country without obtaining significant control over the companies.

Multinational Corporation (MNC): A multinational corporation (MNC) is a company that operates in multiple countries, typically engaging in FDI to expand its operations and access new markets.

Host Country: The host country is the nation where foreign direct investment is made, benefiting from capital inflows, job creation, and economic development.