A foreign direct investment (FDI) is an investment made by a company or individual in one country in business interests located in another country. For instance, an American company investing in a Chinese manufacturing plant would be considered a foreign direct investment. The benefits of foreign direct investment include access to new markets, technology, and jobs.
It also brings capital into the host country. In some cases, it can help spur economic development in the host country. However, there are also risks associated with foreign direct investment. These include political risks, such as unstable governments, and economic risks, such as currency fluctuations.
What is a Foreign Direct Investment?
Foreign direct investment (FDI) is an investment made by a company or individual in one country in business interests in another country, in the form of either establishing business operations or acquiring assets in the other country.
FDI becomes a foreign direct investment when the investing company or individual owns at least 10 percent of the business entity being purchased overseas. For instance, if an American company builds a factory in Mexico, it is considered FDI. If that same American company buys 10 percent or more of a Mexican company, that also qualifies as FDI. Individual investors can also make foreign direct investments by buying stakes of 10 percent or more in foreign companies.
The purpose of FDI is to expand and grow the businesses of the investing companies by taking advantage of new markets and opportunities. By establishing operations in another country, companies can gain access to new customers and enter into new markets. Companies can also use FDI to acquire assets such as land, buildings, or factories as well as intellectual property, such as patents and trademarks.
There are several benefits that can come from Foreign Direct Investment:
- First, by expanding businesses globally through FDI, companies can increase their profits and overall competitiveness.
- Second, FDI brings new technologies and management practices to the host countries, which can lead to increased productivity and higher living standards for residents.
- Third, FDI provides employment opportunities for locals in the host countries.
The Pros and Cons of Foreign Direct Investment
There are both pros and cons to foreign direct investment (FDI). On the plus side, FDI can bring new capital and technology to a country, as well as create jobs. It can also help to stimulate economic growth. On the downside, however, FDI can lead to a loss of domestic control over important industries, and it can also result in negative environmental consequences.
When making a decision about whether or not to allow FDI into their country, policymakers must carefully weigh all of these factors before making a decision.
Foreign Direct Investment and Economic Development
Foreign direct investment (FDI) is a cross-border investment in which a firm acquires a physical production asset in another country with the intention of establishing a lasting interest. FDI is distinct from portfolio investments in which an investor acquires a non-controlling interest in another country’s stock or bond.
Inward FDI can be an important source of capital for developing economies. It can also bring new technologies, know-how, and processes to these economies. However, not all types of inward FDI are equally beneficial for economic development.
For example, “brownfield” investments—which involve the acquisition and expansion of existing businesses—tend to generate more positive spillovers than “greenfield” investments, which involve the creation of new businesses.
In addition to its potential benefits, inward FDI can also have negative effects on economic development. One concern is that MNEs may use their market power to extract rent from host countries, thereby reducing economic efficiency and welfare.
Another concern is that MNEs may transfer technology and know-how to their affiliates in developing countries without adequately compensating the local population for its use. This “knowledge leakage” can impede the competitiveness of local firms and reduce long-term economic growth.
Case Study: China’s Foreign Direct Investment
In recent years, China has been one of the world’s most active foreign direct investors. According to a report by the Rhodium Group, a global market research firm, Chinese firms invested a record $75 billion in the United States in 2016, and $45 billion in Europe.
China’s outbound FDI has been driven by a number of factors, including a desire to access new markets and technology, and to diversify its investment portfolio away from domestic assets. The Chinese government has also encouraged outbound FDI as part of its broader economic development strategy.
Despite these factors, there are some challenges associated with investing in China. These include regulatory hurdles, limited transparency, and intellectual property risks. Nonetheless, many multinational companies have found success in China, and the country remains an attractive destination for foreign investment.