Foreign Direct Investment

Foreign Direct Investment, also popularly known as FDI is the economic scenario whereby a business entity such as a company or a corporation form one nation directly invests in assets and or stakes in another country(Krugman, Obstfeld, & Melitz, 2012). FDI, therefore, entails one company expanding beyond its home borders to establish operations and acquire assets in other businesses across the border. The purchase of assets of a company or firm in another country may be thought of as foreign portfolio investment. However, foreign direct investment is distinguished from such purchases by the assumption of control over the acquired company or firm. In foreign direct investment, there is a transfer of ownership as well as the capital, management, organization, and technology to the purchasing company (Alfaro, Kalemli-Ozcan, & Sayek, 2009). This essay will explore how FDI happens and how it affects the investing and the host countries.

Foreign direct investment happens in three ways. First, there is the horizontal foreign direct investment. In this type, the investing company does not change activities in the foreign country. For example, Coca-Cola produced soft drinks in both China and South Africa as it does in the country of origin. The second type is vertical FDI. In this case, different activities are added in the new environment. For example, Toyota produces cars in Japan but acquires a company that distributes the cars in America or Britain. The new company does something different from the original establishment (Mody, 2004). The third form of FDI is known as conglomerate FDI. In this type, a company acquires a business that performs unrelated activities abroad. The investing company, therefore, attempts to establish itself in a new country while at the same time getting into a new industry. This is a rare scenario and very risky for most businesses. For example, a food and beverage company in America might seek to invest in the tourism industry in China through foreign direct investment. This would mean that the company has to deal with a new environment while at the same time engaging in a new industry (Hill, 2009).

Most nations especially the developing countries are focusing on attracting foreign direct investment. This is because of the perceived benefits of having foreign investors in the country. First, the investors provide the country with employment opportunities for the unemployed people. This helps in the building of the economy and sometimes infrastructural development. Secondly, there is positive technological and intellectual exchange between the company and the local population thereby increasing the chances for improved and sustainable development. Thirdly, through foreign direct investment, many countries can manipulate the gains on investment to their advantage through corporate social responsibility and even investment tariffs. However, foreign investors have been found to be exploitative to the human and natural resources of the host country (Hansen & Rand, 2006).

To their home country, the investors contribute to the gross domestic product and also make meaningful investments in their home country from the proceeds of foreign investment. This means that when a local company acquires stakes in a foreign business and establishes itself, most of the profits will benefit the company locally and the company will be able to make meaningful and more permanent investments at home. Foreign direct investment, therefore, benefits all the players (Alfaro et al., 2009). However, due to the potentiality of exploitation, regulations must be put in place to manage the operations.

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