Foreign direct investment

Definition

Foreign direct investment (FDI) refers to an investment made by a company or individual in one country in business interests in another country, often through establishing business operations or acquiring assets. FDI is crucial in the context of trade and globalization as it enables capital flow between nations, promotes economic growth, and facilitates the transfer of technology and skills.

5 Must Know Facts For Your Next Test

1. FDI can take various forms, including establishing new production facilities, acquiring existing businesses, or forming joint ventures with local companies.
2. Countries with higher levels of FDI often experience faster economic growth due to increased capital, job creation, and improved technology transfer.
3. Developing countries are increasingly attracting FDI as it helps to spur development and improve infrastructure.
4. Governments may incentivize FDI through tax breaks or other benefits to stimulate their economies and create jobs.
5. The rise of digital technology has led to new forms of FDI, such as investments in tech startups and e-commerce platforms.

Review Questions

• How does foreign direct investment influence economic development in host countries?
  • Foreign direct investment plays a significant role in the economic development of host countries by providing essential capital for projects that may not have been possible otherwise. It creates jobs and leads to the transfer of skills and technologies, which can enhance productivity and competitiveness. Moreover, FDI can stimulate local industries through increased demand for goods and services, helping to diversify the economy and reduce dependency on single sectors.
• Evaluate the advantages and disadvantages of foreign direct investment for both home and host countries.
  • Foreign direct investment offers numerous advantages for home countries, such as access to new markets and increased profits from overseas operations. However, it may lead to job losses domestically if companies move operations abroad. For host countries, FDI can boost economic growth and create jobs but may also result in foreign control over key industries, which can limit local businesses' growth. Balancing these factors is crucial for maximizing benefits while mitigating drawbacks.
• Assess the impact of globalization on patterns of foreign direct investment across different regions of the world.
  • Globalization has significantly transformed patterns of foreign direct investment by facilitating greater capital flows across borders. As economies become more interconnected, companies are more likely to invest in emerging markets where growth potential is high. This shift has resulted in increased FDI into developing regions like Southeast Asia and Africa, while traditional investors also seek opportunities in more stable markets. Consequently, globalization has diversified the geography of FDI, creating a more dynamic global economy that continuously evolves.

Related terms

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

Portfolio Investment: An investment strategy where investors buy stocks or bonds in foreign companies without seeking significant control over those companies.

Globalization:

The process of increased interconnectedness among countries, particularly in terms of trade, investment, and cultural exchange.