Foreign direct investment (FDI)

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 can include establishing business operations, acquiring assets, or building new facilities. FDI is significant because it facilitates the transfer of capital, technology, and expertise between countries, often leading to economic growth and integration within global markets.

5 Must Know Facts For Your Next Test

1. FDI can take two main forms: greenfield investments, where new facilities are built from the ground up, and brownfield investments, where existing facilities are acquired and upgraded.
2. Countries often compete to attract FDI by offering incentives such as tax breaks, regulatory reforms, and improved infrastructure.
3. FDI is crucial for developing countries as it provides access to capital and technology that can spur local economic development and job creation.
4. The impacts of FDI can be mixed; while it can lead to economic growth, it may also result in negative externalities such as environmental degradation or exploitation of local labor.
5. Trends in FDI can be influenced by global economic conditions, political stability, and trade policies that either promote or restrict cross-border investments.

Review Questions

• How does foreign direct investment (FDI) contribute to economic integration between countries?
  • Foreign direct investment contributes to economic integration by facilitating the movement of capital and resources across borders. When companies invest in foreign markets, they create linkages between economies through supply chains, technology transfer, and knowledge sharing. This interconnectedness fosters economic collaboration and can lead to greater stability and mutual benefits among nations involved.
• Evaluate the advantages and disadvantages of foreign direct investment for host countries.
  • Foreign direct investment offers several advantages for host countries, including increased capital inflow, job creation, and access to new technologies that can enhance productivity. However, disadvantages may arise as well; these can include potential exploitation of local resources, adverse impacts on local businesses that struggle to compete with large multinational firms, and the risk of creating economic dependency on foreign entities. Balancing these factors is crucial for sustainable development.
• Assess the role of government policies in shaping foreign direct investment trends and their implications for global trade.
  • Government policies play a critical role in shaping foreign direct investment trends by establishing regulatory environments that either attract or deter investors. Policies that promote transparency, offer incentives, and ensure political stability tend to encourage FDI inflows, which can enhance a country's position in global trade networks. Conversely, restrictive policies can hinder FDI, limiting access to international markets and reducing economic growth potential. Thus, effective governance is essential for maximizing the benefits of FDI within the global economy.

Related terms

Portfolio Investment: A form of investment in which an individual or institution invests in financial assets such as stocks and bonds, rather than directly investing in physical assets or business operations.

Multinational Corporation: A company that operates in multiple countries, managing production or delivering services in more than one country, often through subsidiaries.

Globalization: The process by which businesses and other organizations develop international influence or start operating on an international scale, often leading to increased trade and investment flows.