Foreign Direct Investment

Introduction

Foreign direct investment or FDI means when a foreign company invests in a different country other than the host country. In today’s business FDI plays a major role worldwide. It helps in the economic growth of a country’s economy which means creating new jobs, expansion of the existing market. FDI is vital for both developed and developing countries. According to UNCTAD, FDI has become a really international occurrence, no longer the exclusive preserve of OECD countries. FDI has developed in significance in the international economy with FDI stocks now comprising 28 percent of global GDP (UNCTAD, 2008)


Factors affecting FDI

It’s a big decision for companies investing outside their own countries. In recent times FDI is not limited to huge corporations only. Small and medium sized companies are also eager to check the possibilities to invest in a foreign country. For example, a flower company could affiliate themselves with a company in another country where producing flowers are cheaper, while the investor company can help them with the knowledge and the required machinery for effective flower growing, the target company would provide cheaper labor resulting in higher profit. But there are factors on which a company decides if it is safe to invest in that particular geographic location. The Doing Business website by The World Bank measures the scope for businesses all over the world. They have their set criteria on which they rank countries. It’s called “Ease of doing business” rank. Countries ranking top are those where it is very easy to set up new business and at the tail end are those where it is most difficult. The criteria they use for the rankings are: (World Bank, 2008)

Starting a business

Dealing with construction permits

Employing workers

Paying taxes

Registering property

Getting credit

Protecting investors

Enforcing contracts

Trading across borders

The other factors as cited by The Economist journal are FDI protectionism and political. “Appeals to security threats and fears about the consequences of globalization have prompted several governments to review and in some cases tighten their FDI regulations.”
“Some firms may be reluctant to engage in a cross border deal if they feel that opposition from the host government might be an issue”. (The Economist, 2007)


FDI Advantages & Disadvantages

Advantages

a. Flow of money into the economy which encourage economic activity
b. Unemployment reduces. New jobs are created
c. Aggregate demand will also shift outwards as investment is an element of aggregate demand
d. Encourages domestic producers, a spur to become more efficient
e. The government of the country experiencing rising intensity of FDI will have a greater role at international organizations as their country will have more stakeholders in it.

Disadvantages

a. Can cause inflation.
b. If domestic firms are uncompetitive they might get out of the business.
c. If there is an excess FDI into one industry e.g. the garments industry, then a country can become too reliant on it and it may turn into a threat

Case Study: MNC Companies (Toyota)

Multinational automobile companies like Toyota despite having huge profits are opening their new plants in many parts of the world. Their plant in U.S.A shows that FDI is not only for developing nations. It’s also an approach to get hold of new markets. FDI in developed countries such as U.S.A. also provides the investing company with highly efficient labor. Toyota is an example of diversified Multinational Corporation.
Companies like this always try to reduce their cost in this competitive economy. The prospect of a foreign firm setting up business where labor is not expensive is attractive for the host country as well as the host country’s government. Toyota plants in India serve this purpose.


Case Study: FDI in developing nations (China)

It’s amazing to see how China has become a major player in the international business. This country is hovering to become the biggest FDI destination nation in the world. (The Star, 2008). China has become the investor’s paradise for many multinational companies. From computer companies to automobiles, China has it all. Its success lies in government’s ability to attract foreign investment and the productivity of its huge manpower that are efficient yet inexpensive. The great Chinese transformation can be experienced in Shanghai, a modern beautiful city with thousands of year’s history. In a few decades the country experienced major economic boom with the help of FDI. China should be the role model for all the developing countries. More and more multinational companies are becoming interested to invest in other countries. According to the study of The Institute of International Finance, the amount of FDI into emerging markets increased from $119bn in 2006 to an approximate $256bn last year, with an additional increase to $286bn forecasted for 2008. (Financial Times, 2008).


Conclusion

In today’s time FDI is part of the international business. In the global economy, FDI is of major importance. It is important for any business student to know about FDI because, someway, somehow we are all part of this dynamic mechanism. Learning about FDI would give us important insights about many countries’ business infrastructure, as well as social and cultural issues, providing truly global business knowledge.
While doing the research I learned about the magnitude of FDI, how it helped transform under developed countries into more prosperous ones and definitely the business aspect about how it can help maximize profits for companies both large and small. FDI is inextricably linked with the international business of the 21st century.



Reference

Financial Times. (2008). FDI Magazine. Retrieved from FDI :www.fdimagazine.com
The Economist. (2007). World investment prospects to 2011.
The Star. (2008). China poised to be largest recipient of corporate investment.
UNCTAD. (2008). Retrieved from United Nations Conference Trade and Development: www.unctad.org
World Bank. (2008). Retrieved from Doing Business: www.doingbusiness.org
Nickels, W.G., McHugh, J. M., & McHugh, S.M. (2008). Understanding Business. McGraw-Hill
IMF. (n.d). Retrieved from International Monetary Fund: www.imf.org