Foreign Direct Investment: An Overview

Foreign Direct Investment, shortened to FDI, is a critical element of international economic activity that impacts global economic integration and expansion. With globalisation, both developing and developed economies need this kind of investment. In this overview, let's delve into what is FDI, its different types, and the advantages and disadvantages associated with it.

What is FDI?

It is a direct investment of a shareholder of one country in any business or production asset of another country. In simple words, what is the Foreign Direct Investment? It's an investment under which the investor usually holds significant influence or control over the foreign enterprise. There is also something called Foreign Portfolio Investment (FPI), which involves investors buying shares from companies in other countries but does not provide significant control over the business.

What is Foreign Direct Investment?

FDI full form: Foreign Direct Investment. It can also be defined as an investment made to acquire lasting interest in an enterprise operating in an economy other than that of the investor. FDI full form in Economics particularly focuses on the fact that direct control or significant influence characterises FDI from other foreign investments which do not imply ownership or control of that business.

Types of FDI:

FDI has four categories in terms of the extent and intention of the investments:

Horizontal FDI: Under this, a venture is made in another country whereby a firm would repeat the process of manufacturing goods or services in a new location and can look forward to repeating similar goods. Example: A smartphone firm in the United States builds a factory in India to manufacture phones for sale in the United States. 

Vertical FDI: Now, an investor wants to expand its supply chain by investing in a foreign location. So, when a Japanese motor car manufacturer invests to establish a steel plant inside South Korea to supply the requirements of raw materials for car assembling inside Japan.

Conglomerate FDI: This type of FDI involves an investment in a business activity that need not relate in any manner to the investor's primary business. This happens rarely since very specific knowledge in a completely different industry is needed.

Platform FDI: This type of FDI intends to produce a product in one country solely for export in another. It typically uses regional trade facilities and lower input costs.

FDI Full Form and Its Importance

Understanding the full form of FDI is important to know its impact. FDI brings capital, technology, and expertise, stimulating the growth of the host economy. It creates jobs, increases productivity, and promotes innovation by introducing global practices and competitive pressures.

Advantages of FDI

Foreign Direct Investment is associated with numerous advantages for host countries:

●     Economic Growth: FDI promotes economic growth through employment and productive capacity creation. For most developing countries, FDI primarily contributes to infrastructure development, technological upgradation, and industrial output expansion.

●     FDI means to provide the flow of capital and modern technology that even a country under sanction might not have otherwise had. This flow of technology transfer promotes innovation and modernisation of domestic industries.

●     The operational practices and standards of foreign companies improve the workforce skills in the locality and enhance productivity and employability.

Limitations of FDI

Despite its numerous benefits, FDI has some challenges:

●     Economic Dependence: The host country may become too dependent on foreign investors. Any adverse conditions that result in investors opting to withdraw may negatively affect the economy of the nation.

●     Interference in National Interests: Foreign ownership may influence key industries of a nation, sometimes affecting basic national interests. 

●     Profit Repatriation: Foreign firms tend to repatriate profits back into their parent country, which may limit the potential earnings of the host country.

Basically, what is Foreign Direct Investment? It's a catalyst for global economic integration. The very definition of "Foreign Direct Investment" reflects its purpose: to directly impact and influence a foreign economy, as opposed to other forms of investment. FDI provides countries access to capital, advanced technologies, and invaluable expertise, hence contributing to industrial and economic development over the long run.

FAQs

What is FDI?

FDI simply represents an investment by an enterprise or a person from one country in an enterprise that is located somewhere else, with the expectation of generating long-run interest and control over that enterprise.

What is meant by foreign investment?

Foreign investment is the movement of capital from one country into another, either in FDI or FPI and brings about acquisition and control over the foreign asset or entity.

What are the 4 types of FDI?

The four categories of FDI that define how a firm can approach investment in overseas markets are Horizontal, Vertical, Conglomerate, and Platform.

What are the advantages of FDI?

Some of the merits attributed to FDI are economic growth, talent formation, capital access, and high technologies.

What are the benefits of FDI?

It is also useful to the host economy, which enhances employment, productivity growth, and industrialisation. 

What are the factors affecting Foreign Direct Investment?

Such factors could include political stability, economic policies, market size, resource availability, and infrastructural quality. 

What is the difference between FPI and FDI?

FPI involves buying assets abroad without control, while FDI entails purchasing shares with management and control rights.  

What is the main disadvantage of Direct Investment?

The primary drawback can be economic dependence and potential loss of direct control by locals, as FDI can shift influence from local to foreign hands. 

Why is FDI needed?

FDI is important because it complements economic growth by bringing capital, new technologies, and opportunities for job, especially to developing economies.