Foreign direct investment

Definition

Foreign direct investment (FDI) is a financial investment made by a company or individual in one country into business interests located in another country. This usually involves acquiring assets, establishing business operations, or expanding existing operations in the foreign country. FDI plays a significant role in global economics, as it fosters economic growth, creates jobs, and facilitates technology transfer between countries.

5 Must Know Facts For Your Next Test

1. FDI can significantly boost the economy of the host country by creating new jobs and increasing capital inflow.
2. Developing countries often attract FDI by offering incentives such as tax breaks or regulatory advantages to foreign investors.
3. One concern with FDI is that it can lead to economic dependency on foreign firms, which might not prioritize local interests.
4. FDI is often seen as a more stable form of investment compared to portfolio investments, as it involves long-term commitments to the local economy.
5. The World Bank actively promotes FDI as a means of achieving sustainable development and poverty reduction through its investment policies and support programs.

Review Questions

• How does foreign direct investment contribute to the economic growth of developing countries?
  • Foreign direct investment (FDI) contributes to economic growth in developing countries by creating jobs, enhancing productivity, and providing access to new technologies and skills. When foreign companies invest in these countries, they often bring capital, expertise, and innovative practices that can improve local industries. This influx not only boosts employment but also increases tax revenues for the government, which can be used for public services and infrastructure development.
• Discuss the potential risks associated with foreign direct investment for host countries.
  • While foreign direct investment can provide significant benefits to host countries, there are also potential risks involved. These include economic dependency on multinational corporations, which might prioritize profits over local community needs. Additionally, FDI can lead to environmental degradation if foreign firms exploit natural resources without regard for sustainability. The presence of foreign firms can also sometimes stifle local businesses by creating unfair competition.
• Evaluate the role of institutions like the World Bank in facilitating foreign direct investment and its implications for global economic relations.
  • Institutions like the World Bank play a critical role in facilitating foreign direct investment by providing funding, guidance, and support for both investors and host countries. By promoting policies that create favorable conditions for FDI, the World Bank aims to enhance sustainable economic development globally. This involvement can improve international relations by fostering collaboration between countries; however, it may also lead to tensions when the interests of local communities are overlooked in favor of foreign investments.

Related terms

Multinational Corporation: A corporation that has facilities and assets in at least one country other than its home country, typically operating on a global scale.

Portfolio Investment: An investment in financial assets such as stocks and bonds, as opposed to foreign direct investment, which involves acquiring a significant interest in a foreign business.

Economic Development: The progress in an economy that leads to the improvement of living standards, including factors such as employment rates, income levels, and quality of life.