Foreign Direct Investment (FDI) is a crucial part of a national economy, which is why it is a part of the curriculum for almost every finance and economics course. If you are currently pursuing any of these two courses, you will be introduced to the topic of FDI at some point. However, if you want to gather some basic knowledge about the topic beforehand, just keep reading this blog. ( Product Churn)
What Is Foreign Direct Investment?
Foreign direct investment is a form of investment made by a party in one country into a business or corporation in another country with the objective of establishing a lasting interest. Now, the lasting interest differentiates FDI from foreign portfolio investments. (Corporate Strategy Assignment Help)
An investor is able to make a foreign direct investment by expanding his/her business on foreign soil. If the investor reinvests profits from overseas operations and the intra-company loans to overseas subsidiaries, those are also considered FDI. Proper FDI planning is necessary for the brand management of a business that is operating in different countries. (Dissertation Abstract, Online Shopping Cart System)
Benefits of Foreign Direct Investment
FDI is beneficial for both investors and the foreign hosting country. Such advantages encourage both parties to involve themselves in FDI. Some of the major benefits of FDI are mentioned below:
The businesses enjoy:
- Diversification of market
- Tax incentives
- Lower labour costs
- Subsidies
- Preferential tariffs
The host country enjoys
- Economic stimulation
- Development of human capital
- Increase in employment
- Access to skills, technology, and management expertise
For businesses, a majority of these benefits are based on cost-cutting and lowering risk. So, the cost-benefit analysis of FDIs usually offers positive results.
The Disadvantages of Foreign Direct Investment
While FDI offers plenty of benefits, it also has its fair share of disadvantages. Two primary disadvantages of FDI include,
- Displacement of local businesses
- Profit repatriation
When a large international firm opens its business in a foreign country, the local businesses in that country start to suffer. We all have seen what IKEA and Walmart are doing to the local businesses. Also, the firms will not reinvest profits back into the host country, leading to large capital outflows from the host country.
Hopefully, now you have a better understanding of the issue of FDI. However, if you want, you can learn more about FDI from your textbook or ask your professor for book recommendations.