Advantages of Foreign Direct Investment – Weighing Pros and Cons

admin — Mon, 28 Nov 2011 18:34:08 +0000

There is a constant debate between the good and bad aspects of FDI, which causes some hesitance for investors. But, when the pros outweigh the cons, most investors will find that the risk is worth it. Over the years, the number of countries who are participating in FDI has significantly increased and because this type of investment creates more of an opportunity for companies to explore the aspect of international business. Companies are finding that they are becoming more successful when they choose to expand their businesses into foreign land because of the increased opportunity.

Pros

Allows for an exchange of useful skill sets and information
Creates more job opportunities
Aggregate supply is shifted outward
Cost per unit will decrease, especially when the foreign company is in a less-developed country.
GDP will increase

Cons

Increased inflation
Local job market negatively affected
Foreign company becomes dependent upon investors for sustainability
Heavy upfront costs

What is Foreign Direct Investment?

admin — Mon, 21 Nov 2011 18:34:04 +0000

Foreign Direct Investment, commonly known as FDI, occurs when a company decides to invest in another company that operates outside of their economic domain.FDI refers to the measure of how many assets a company has from foreign operations, such as land, factories, and organizations.

It is referred to as direct because the company seeking to invest wants to have total control and have a significant influence on the foreign entity and they create physical investments such as factories. An indirect investment would be seen as a financial portfolio because it’s only a monetary investment as opposed to a physical one. FDI is useful for companies who have low capital because they can find investors to finance them and keep the company operating.

The most common FDI ventures are between more developed countries such as the United States and China, but ventures are also increasing with less developed areas due to the fact that wealthier economies can invest more money in the foreign company and also save more money due to tax breaks and less expensive operating costs. The United States is a country that is notorious for participating in FDI, even with the slump in economy that is has recently gone through. Foreign countries view the United States as a relatively safe place for investing, and the US does a lot of business with both investing and being invested in.

Over the years, the methods of FDI have changed. This is due to the changes in technology, licensing, intellectual property, government investment framework, changes in trading policies, and changes in capital markets. With all of these changes to policies, FDI has become more stringent about rules and regulations, but the percent of countries participating in foreign activities has increased greatly. It also creates more of an opportunity for companies to explore the aspect of international business.