Foreign investment

Definition

Foreign investment refers to the allocation of capital by individuals, firms, or governments from one country into assets in another country, typically with the expectation of generating a return. This can take various forms, including foreign direct investment (FDI), where investors gain a significant degree of control over the foreign assets, and portfolio investment, which involves the purchase of financial assets like stocks and bonds. Such investments are often influenced by trade liberalization policies and major trade agreements that facilitate cross-border capital flows.

5 Must Know Facts For Your Next Test

1. Foreign investment has grown significantly due to trade liberalization, allowing countries to attract more capital from abroad.
2. Major trade agreements, such as NAFTA and the TPP, have provisions that encourage foreign investment by providing greater protections for investors.
3. Countries with stable political and economic environments tend to attract more foreign investment because they offer lower risks for investors.
4. Foreign investment can lead to job creation, technology transfer, and increased competition in the host country’s market.
5. While foreign investment can be beneficial, it can also create challenges, such as the risk of economic dependence on foreign entities and potential loss of local control over strategic industries.

Review Questions

• How does foreign investment contribute to economic growth in host countries?
  • Foreign investment contributes to economic growth in host countries by providing essential capital for development projects and business expansion. It often leads to job creation as new businesses are established or existing ones expand their operations. Additionally, foreign investors can introduce new technologies and managerial practices, which can enhance productivity and competitiveness in the local economy.
• Discuss the impact of trade liberalization on foreign investment flows and how it changes the landscape for international businesses.
  • Trade liberalization significantly impacts foreign investment flows by reducing barriers to entry for international businesses. When countries lower tariffs and quotas through agreements, they create a more favorable environment for foreign investors. This encourages businesses to expand internationally as they seek new markets and opportunities for growth. As a result, countries that embrace trade liberalization often experience increased levels of FDI, leading to economic benefits like increased employment and innovation.
• Evaluate the potential risks and benefits associated with an increase in foreign investment within a country’s economy.
  • The increase in foreign investment brings both risks and benefits to a country's economy. On the positive side, it can lead to significant economic growth through job creation, technology transfer, and increased competition. However, there are also risks involved, such as economic dependence on foreign entities which may lead to loss of local control over key industries. Additionally, if profits generated by foreign investments are repatriated rather than reinvested locally, this could limit the long-term benefits for the host economy. Balancing these factors is essential for sustainable economic development.

Related terms

Foreign Direct Investment (FDI): A type of foreign investment where an investor establishes business operations or acquires business assets in a foreign country.

Portfolio Investment: Investment in financial assets, such as stocks and bonds, in a foreign market without obtaining significant control over the companies.

Trade Liberalization: The removal or reduction of trade barriers, such as tariffs and quotas, to encourage free trade between countries.