Foreign Direct Investment
Foreign direct investment (FDI) is defined as an investment made by a company or entity based in one country into another country or entity in order to form a lasting interest. FDI goes beyond setting up a subsidiary, joint venture or any other kind of foreign establishment in another country, and usually gives the investor a certain degree of managerial control over the company they are investing in.
Generally, the primary motivation behind FDI is to profit from the differences in the markets of the two countries, such as lower production costs or high demand for a company’s products in the target country. FDI also allows for access to resources in the target country, such as technology, labor, and markets as well as access to strategic alliances and consortia made up of global partners.
FDI is currently one of the four most important financial flows to developing economies, the other three being commercial loans, remittances, and portfolio investment. FDI is believed to be instrumental in creating jobs and increasing productivity in the host country, the most recognizable benefit that foreign markets present. It also supports spillover effects, as FDI often leads to technology transfer, aiding in upgrading the host country’s production process with international know-how and experience.
Foreign direct investment can come in several forms. It can be a direct investment done through a foreign subsidiary, where a company directly owns property, plant, and equipment. FDI can also come in the form of a joint venture or consolidation where a foreign investor owns a share in a combined or joint business along with one or more partners abroad. FDI may also occur as portfolio investments, in which foreign entities acquire stocks and other equity securities in foreign-based companies.
In order for a foreign investor to enter any overseas market, the relevant governments must first sign a bilateral investment treaty or multilateral investment agreement. These agreements set out legal parameters for foreign investment and protect foreign investors from expropriation of their investments by the host country. The agreements also serve to ensure that the host country has access to capital from world markets and to ensure that the host country can protect its national interests.
Over recent decades, FDI has become an increasingly significant driver of global economic activity. FDI inflow to the largest economies, such as the United States, China, and the European Union, represents a major share of their gross domestic product. FDI is also estimated to finance around 30% of global trade which is often higher than goods and services trade. In 2018, the total global FDI inflow was estimated to be $1.3 trillion, showing a 19% increase from 2017.
In conclusion, foreign direct investment is an attractive option for foreign investors and can provide a range of economic benefits to both the investing and host countries. FDI helps to promote growth, create jobs, and transfer technology, capital and know-how to the host country. FDI can also offer foreign firms access to new markets and promote competition within the host country. As such, governments around the world are creating measures to attract more FDI and are becoming increasingly competitive in their investment policies.
