Foreign Direct Investment

Definition

Foreign direct investment (FDI) refers to the investment made by an individual or company in one country into business interests located in another country. This type of investment allows the investing entity to have a degree of control and influence over the foreign company or asset.

5 Must Know Facts For Your Next Test

1. Foreign direct investment allows companies to access new markets, resources, and technologies, while also diversifying their operations globally.
2. Multinational corporations often use foreign direct investment as a strategy to expand their international presence and gain a competitive advantage.
3. Greenfield investments and mergers and acquisitions are two common forms of foreign direct investment that companies use to enter new foreign markets.
4. Governments often use policies and incentives to attract foreign direct investment, as it can bring economic benefits such as job creation, technology transfer, and increased exports.
5. The level of foreign direct investment in a country can be influenced by factors such as political and economic stability, infrastructure, labor costs, and the regulatory environment.

Review Questions

• Explain how foreign direct investment allows companies to access new markets and resources.
  • Foreign direct investment enables companies to expand their operations and access new markets, resources, and technologies that may not be readily available in their home country. By establishing a physical presence in a foreign market, companies can better understand local consumer preferences, gain proximity to key suppliers or distribution channels, and leverage local talent and expertise. This can help companies diversify their operations, increase their global competitiveness, and capitalize on growth opportunities in emerging markets.
• Describe the role of multinational corporations in driving foreign direct investment.
  • Multinational corporations (MNCs) are often the primary drivers of foreign direct investment, as they seek to expand their global reach and capitalize on opportunities in foreign markets. MNCs use foreign direct investment strategies, such as greenfield investments or mergers and acquisitions, to establish operations, production facilities, or acquire existing companies in other countries. This allows MNCs to access new customer bases, gain a competitive advantage, and leverage local resources and capabilities to support their overall business objectives and growth.
• Analyze how government policies and incentives can influence the level of foreign direct investment in a country.
  • Governments often use various policies and incentives to attract foreign direct investment, as it can bring significant economic benefits to the host country. These policies may include tax incentives, subsidies, streamlined regulatory processes, investment protection agreements, and the development of special economic zones or free trade areas. By creating a favorable business environment and addressing potential barriers to entry, governments can encourage multinational corporations and other foreign investors to establish operations within their borders. This, in turn, can lead to job creation, technology transfer, increased exports, and overall economic growth and development.

Related terms

Multinational Corporation (MNC): A large company that has operations and assets in at least one country other than its home country, often through foreign direct investment.

Greenfield Investment: A type of foreign direct investment where a parent company builds its operations in a foreign country from the ground up, constructing new production facilities and infrastructure.

Mergers and Acquisitions (M&A): A type of foreign direct investment where a company in one country acquires or merges with a company in another country, gaining control over the foreign asset.