Foreign direct investment

Definition

Foreign direct investment (FDI) refers to the investment made by a company or individual in one country in business interests located in another country. This usually involves acquiring assets, establishing business operations, or expanding existing operations abroad, and plays a critical role in shaping economic relationships and development globally.

5 Must Know Facts For Your Next Test

1. FDI can take various forms, including mergers, acquisitions, and establishing new businesses, which significantly contribute to economic growth in host countries.
2. The flow of FDI is often influenced by factors like political stability, regulatory environment, and market potential of the host country.
3. FDI not only brings capital but also technology transfer, management expertise, and access to international markets for local companies.
4. Emerging economies are increasingly becoming attractive destinations for FDI due to their growing markets and labor forces.
5. The relationship between FDI and sustainable development is complex; while FDI can stimulate growth, it can also lead to environmental degradation and socio-economic inequalities if not managed responsibly.

Review Questions

• How does foreign direct investment impact economic development in host countries?
  • Foreign direct investment significantly impacts economic development in host countries by providing capital for infrastructure and business growth. It facilitates technology transfer and enhances local skills through training and knowledge sharing. Moreover, FDI can help create jobs and improve overall productivity. However, the benefits can vary based on how well local governments manage and regulate these investments.
• In what ways do multinational corporations leverage foreign direct investment to expand their global presence?
  • Multinational corporations leverage foreign direct investment to expand their global presence by establishing operations in new markets through mergers and acquisitions or setting up greenfield investments. This strategic expansion allows MNCs to diversify their portfolios, minimize risks associated with market fluctuations, and tap into local resources and labor. By doing so, they can effectively respond to consumer demand while also enhancing their competitive advantage.
• Evaluate the potential benefits and drawbacks of foreign direct investment in relation to sustainable development goals.
  • The potential benefits of foreign direct investment regarding sustainable development goals include increased economic growth, job creation, and technology transfer that can enhance local capacities. However, the drawbacks include possible environmental degradation and socio-economic inequalities if investments prioritize profit over sustainable practices. Evaluating these aspects requires careful consideration of how FDI aligns with the specific sustainable development goals of host countries and whether regulations are enforced to ensure responsible practices.

Related terms

Multinational Corporation: A multinational corporation (MNC) is a large company that operates in multiple countries, often managing production or delivering services across borders.

Portfolio Investment: Portfolio investment involves investing in financial assets such as stocks and bonds in another country without seeking to gain significant control over the businesses.

Globalization: Globalization is the process of increased interconnectedness and interdependence among countries, characterized by trade, investment, and cultural exchange on a global scale.