Foreign Direct Investment refers to the investment by one company or individual of one country to the business concerns of another country. It works as a growth-enhancer, developer, and integrator. Thus, to have an answer to how FDI benefits the investor and a host country, we have to learn about its objectives. These objectives are therefore diverse in nature and thus aim at various considerations that touch on market expansion, technology transfer, and economic development.
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Meaning of Foreign Direct Investment (FDI)
Foreign Direct Investment (FDI) is an investment by a firm or person in one country in any of the following: business operations, assets, or ownership stakes in companies located in another country. Other forms of portfolio investments that are made with a definite intention to invest shares or securities of companies whose business is domiciled in another country, FDI means an interest that has a lasting and significant control over the business.
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Features of FDI:
Foreign direct investment forms the basis of defining the world economy due to its role in cross-border investments and fostering economic integration. FDI has various distinct features from other forms of investment. Among the reasons why growth for investors and host countries has a strong impetus from these investments are the following features that define FDI:
Ownership: The foreign firm has a high percentage of control and has at least 10% of the firm's voting power.
Long-term Investment: FDI is characterized by its long-term feature since the investor has a long-term stake in the foreign company and its activities.
Management Control: FDI is as different as night and day from portfolio investment since it involves active participation in the management and running of the foreign firm.
Cross-border flows: FDI involves the crossing of borders since capital, technology, and management skills flow across borders.
Two-way benefits: While the investor benefits by earning profit and markets, the host country benefits from capital inflows that create jobs and generate technology transfers.
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Objectives of Foreign Direct Investment (FDI)
Foreign Direct Investment, or FDI in short, is among the significant contributors to growth and globalization through which firms can expand their territories beyond territorial lines. While in the FDI, new market access, resources, and technologies are acquired for the host country, benefits of capital inflows in the host nation along with job creation and economic development take place. Once the objective behind FDI is understood, such cross-border investments and their implications on the investor as well as the recipient economy can be justified. The primary objectives of FDI are as follows:
1. Market Expansion
Market seeking is the most important reason for FDI. Companies invest in a foreign market to expand their market share, attain a large population of consumers, and avoid the risks of concentration in domestic markets. Firms can also have greater demand, favorable market conditions, and new revenues through access to international markets.
2. Resource seeking
FDI enables firms to access resources that may be scarce or unattainable in the parent country. Such resources include raw materials, human capital, and some technological know-how. A firm will ensure the right inputs into maintaining its operations if it invests directly in another country at the right cost to attain its maximum competitiveness.
3. Cost Efficiency
One of the chief goals of FDI is to reduce the operation cost of the operation. Companies have thus invested in countries that can provide cheap production costs, for example, low-paid labour, less taxation, or even government incentives. In this regard, profits increase, and the companies are in a position to achieve competitiveness against other firms in their specific line of business. This ability to produce at lower prices can also be a means by which companies can have goods at cheaper prices available for consumers, an advantage.
4. Access to Technology and Innovation
FDI can further be motivated by the desire to acquire technological innovation. Companies in advanced industries start investing in foreign firms or partnering to share technology, research, and expertise. This goes ahead to accelerate the advancement of technology and enhances innovation within and outside the home countries into industries and the economy as a whole.
5. Improving Global Supply Chain
Another important aim of FDI is to make a company's global supply chain structure stronger, more efficient, and more resilient. A firm can do this by investing in various geographical locations because it diversifies its production and distribution structures to potentially cover markets in every place on the globe. In this manner, companies can better control their supply chains as they manage less risk because of the chance that a supply chain disruption is spurred by geopolitical issues, trade restrictions, and natural disasters.
6. Diversification of Investment Portfolio
Diversification is one of the key objectives of FDI for multinational corporations. Businesses invest in various countries to disperse the risks of adverse developments in one region from affecting them highly financially. FDI provides companies an opportunity to access many different industries, economies, and markets and, thus, can help them attain higher financial stability.
7. Host Country Economic Development
From the host country's angle, FDI is almost like an instrument of economic development. It brings crucial capital into the economy, generates employment, upgrades infrastructure, and enhances the skill levels of the indigenous people. Transfer of technology and managerial experience from foreign investors also contributes to the development of domestic industries. For developing countries, FDI can be a very important stimulant toward economic growth, poverty reduction, and increased living standards.
8. Building International Relations
FDI fosters international relations and develops inter-country relations. Firms operating in foreign countries would tend to be in a tie with local firms, governments, and other people. Such ties can facilitate bonding for diplomatic interactions as well as economic cooperation among nations. This is further strengthened to have a boost to the international overall trade as well as cooperation.
9. Competitiveness
Companies that engage in FDI seek to increase their competitive advantage around the globe. Businesses can reach large markets, avoid competitors, and potentially become more profitable than trends by internationalizing. Another imperative for firms to engage in international operations is to track competitors and innovation happening in the host country to maintain a competitive advantage.
10. Economies of Scale Through Profit Maximization
FDI allows firms to realize economies of scale. When a firm expands its operations across countries, it raises its production capacity and consequently, lowers the cost per unit of the goods or services produced. Consequently, a firm gains profitability because it can sell the same product at prices that are relatively close to what other firms are selling for but maintain its quality. Economies of scale also improve the efficiency with which firms carry on their business affairs. Companies can utilize resources better.
11. Political and Economic Stability
Political and economic stability is the most familiar objective of FDI. As such, companies invest in countries with stable political climates and also favorable economic policies to protect investment. It is relatively low risk in a country that has a favourable legal framework, protection of foreign investors, and predictable government policies.
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Conclusion
For the investor and host countries, Foreign Direct Investment is possibly one of the most vital tools toward the realization of global economic integration and market development as well as sustainable development. Since FDI can encompass diverse goals, multiple objectives are indicated by it due to the particularly complex nature of the aims of the businesses, governments, and economies involved. Innovation, economic growth, and international cooperation will continue unfolding as FDI is likely to be the driving force behind it.
Objectives of FDI FAQs
Q1. What is Foreign Direct Investment (FDI)?
FDI refers to investments made by a company or individual from one country into a business located in another country. It entails the acquisition of an important ownership stake and control over a foreign firm.
Q2. What are the types of FDI?
The major types of FDI are Horizontal FDI, Vertical FDI, Conglomerate FDI, Greenfield Investment, and Brownfield Investment.
Q3. How does FDI help the host nation?
FDI adds to capital, offers employment opportunities, fosters the process of technology transfer, improves infrastructure, and raises the efficiency of indigenous enterprises in the host nation. It also helps create and facilitate economy building and contributes towards knowledge sharing with other nations around the world.
Q4. What induces a government to attract FDI?
The motivation of a government to attract FDI is through tax benefits and subsidies coupled with liberalized investment policies; they also engage in bilateral investment treaties and establish sector-specific regulations to promote foreign investment.
Q5. What is the Difference between FDI and portfolio investment.
The primary differences between FDI and portfolio investment are as follows: FDI involves long-term investment and exercise of control over businesses in other countries; in contrast, portfolio investment refers to shares or securities without significant control over management.
