Definition Definition

What Is Foreign Direct Investment (FDI)? Importance of FDI with Examples

Foreign Direct Investment Definitions

Foreign Direct Investment (FDI) refers to purchasing physical assets, such as plants and equipment, in a foreign country to be managed by the parent corporation. FDI is in contradistinction to foreign portfolio investment.

Definition 2

Foreign Direct Investment (FDI) is defined as investment made by individuals, businesses, or governments from one nation into another with the intention of building a long-term interest in the foreign country's economy.

More Thorough Understanding of the Term FDI 

FDI differs from other types of investment, such as portfolio investment, in which investors own securities such as stocks and bonds and do not actively participate in the management or operations of the investment firm. The investor often actively manages the foreign business and may strive to influence its strategic decisions, operations, and performance through FDI.

Foreign direct investment can benefit and negatively affect the host country. On the plus side, it can provide access to new markets, technology, and experience and help local industries thrive. It can also raise taxes and boost economic growth

However, there may be difficulties associated with FDI, such as potential negative consequences on local firms, cultural and societal concerns, and hazards related to natural resource exploitation.

Tax cuts, infrastructure development, and regulatory reforms are common strategies and incentives governments and policymakers use to encourage FDI. However, regulatory structures and constraints are in place to guarantee that FDI does not impair the host country's national interests.

Importance of FDI

Foreign direct investment is vital because it may benefit both the investing and host countries, such as economic growth, job creation, technology transfer, infrastructure development, and entrepreneurial development.

Foreign direct investment (FDI) can bring fresh capital, experience, and management methods to the host country, stimulating economic growth and development. FDI can also create jobs by increasing the demand for local labor and assisting regional business growth in the host country.

However, host countries must carefully monitor and control FDI to ensure it aligns with their national interests and fosters long-term and inclusive growth. 

Real-Life Examples

Example 1

Japanese automaker Toyota announced a $2 billion investment in a new facility in Alabama, USA, in 2018 to create hybrid versions of its popular automobiles. This investment produced jobs, transferred modern technologies, and contributed to the local community's economic prosperity.

Example 2

Samsung Electronics of South Korea announced a $10 billion investment in a semiconductor manufacturing facility in Texas, USA, in 2019. This investment sought to increase the manufacturing of innovative semiconductors for various applications, including 5G technology, and to reinforce Samsung's worldwide semiconductor leadership.

In Sentences

  • FDI usually entails acquiring or establishing ownership or control of a foreign business or enterprise.
  • FDI can have a significant impact on the economy of the host country.
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