Foreign direct investment

Definition

Foreign direct investment (FDI) is an investment made by a company or individual in one country into business interests located in another country, typically through the establishment of business operations or the acquisition of assets. FDI is crucial for economic growth as it often brings capital, technology, and expertise to the host country, facilitating development and integration into the global economy.

5 Must Know Facts For Your Next Test

1. FDI can take various forms, including greenfield investments (building new facilities) and brownfield investments (buying existing facilities).
2. Countries often create favorable policies and incentives to attract foreign direct investment, as it can lead to job creation and increased economic activity.
3. The flow of FDI has been increasing globally, particularly from developed countries investing in emerging markets, reflecting a shift towards globalization.
4. Foreign direct investment can also lead to potential challenges for host countries, such as economic dependency on foreign entities and impacts on local businesses.
5. In recent years, FDI trends have been influenced by global events like trade agreements, political stability, and changes in regulation regarding foreign ownership.

Review Questions

• How does foreign direct investment contribute to economic growth in host countries?
  • Foreign direct investment contributes to economic growth in host countries by providing essential capital for development, creating jobs, and enhancing local infrastructure. FDI also introduces new technologies and managerial expertise, which can improve productivity and efficiency in the local economy. Moreover, it encourages competition among local businesses, fostering innovation and improving consumer choices.
• Evaluate the impact of foreign direct investment on local businesses within host countries.
  • The impact of foreign direct investment on local businesses can be both positive and negative. On one hand, FDI can lead to increased competition, encouraging local companies to innovate and improve their products or services. On the other hand, large multinational corporations may dominate the market, making it difficult for smaller local businesses to compete. This can result in market consolidation and potential job losses if local companies cannot adapt or thrive alongside foreign entrants.
• Analyze how global economic conditions influence trends in foreign direct investment flows between developed and developing countries.
  • Global economic conditions play a significant role in shaping trends in foreign direct investment flows. For instance, during periods of economic expansion, developed countries are more likely to invest heavily in developing nations seeking new markets and opportunities for growth. Conversely, economic downturns can lead to a decline in FDI as companies become risk-averse and cut back on international investments. Factors such as political stability, regulatory environments, and trade agreements also influence these trends by either encouraging or deterring foreign investments across borders.

Related terms

Portfolio Investment: Portfolio investment refers to the purchase of financial assets such as stocks and bonds in another country, which does not provide the investor with significant control over the companies invested in.

Multinational Corporation: A multinational corporation is a company that operates in multiple countries, often engaging in foreign direct investment to establish operations or subsidiaries in those nations.

Host Country: A host country is a nation where foreign direct investments are made, benefiting from the influx of capital and resources from foreign investors.