Foreign Direct Investment

Definition

Foreign direct investment (FDI) refers to an investment made by a company or individual in one country in business interests located in another country. This can include establishing business operations, acquiring assets, or expanding existing operations. FDI is crucial for global capital markets as it facilitates cross-border financial flows, enhances economic development in host countries, and creates international corporate partnerships.

5 Must Know Facts For Your Next Test

1. FDI is typically motivated by factors such as access to new markets, resources, and technology, as well as opportunities for diversification and profit maximization.
2. Host countries often encourage FDI through incentives such as tax breaks and reduced regulations to attract foreign capital and stimulate local economies.
3. There are two main types of FDI: greenfield investments, where new facilities are built from scratch, and brownfield investments, where existing facilities are acquired or expanded.
4. FDI can have significant impacts on the host country's economy, including job creation, technology transfer, and increased competition within domestic markets.
5. Political and economic stability in the host country is critical for attracting FDI, as investors seek environments that minimize risks associated with their investments.

Review Questions

• How does foreign direct investment influence global capital markets and economic development?
  • Foreign direct investment significantly influences global capital markets by facilitating the flow of capital across borders, which helps integrate economies. It encourages economic development in host countries by creating jobs, transferring technology, and increasing productivity. As companies invest directly in foreign markets, they establish deeper connections with local economies and contribute to growth through infrastructure development and improved market access.
• Evaluate the advantages and disadvantages of foreign direct investment for both the investor and the host country.
  • Foreign direct investment offers numerous advantages for investors, including access to new markets and reduced production costs. For host countries, FDI can lead to job creation and economic growth. However, disadvantages exist; investors may face political risk or regulatory hurdles. Host countries might experience negative impacts such as potential market dominance by foreign firms, profit repatriation that limits local reinvestment, and adverse effects on local businesses.
• Critically analyze how political stability influences foreign direct investment flows into emerging markets.
  • Political stability plays a crucial role in determining foreign direct investment flows into emerging markets. Investors seek environments where the risk of expropriation, abrupt policy changes, or civil unrest is minimal. Stable political conditions create a more predictable business climate that encourages long-term investments. In contrast, instability can deter FDI as companies weigh the potential risks against expected returns, leading to decreased economic growth opportunities for those emerging markets.

Related terms

Multinational Corporation: A multinational corporation (MNC) is a company that has facilities and assets in at least one country other than its home country, and operates on a global scale.

Portfolio Investment: Portfolio investment involves investing in financial assets such as stocks and bonds in a foreign country, but does not provide the investor with control over the companies invested in.

Joint Venture: A joint venture is a business arrangement in which two or more parties agree to pool their resources for a specific task, often involving FDI where partners share risks and profits.