Foreign Direct Investment Pros & Cons Cheat Sheet (DRAFT) by [deleted]

Foreign direct investment (FDI) is made into a business or a sector by an individual or a company from another country. It is different from portfolio invest­ment, which is made more indirectly into another country’s economy by using financial instru­ments, such as bonds and stocks.

There are various levels and forms of foreign direct invest­ment, depending on the type of companies involved and the reasons for invest­ment. A foreign direct investor might purchase a company in the target country by means of a merger or acquis­ition, setting up a new venture or expanding the operations of an existing one. Other forms of FDI include the acquis­ition of shares in an associated enterp­rise, the incorp­oration of a wholly owned company or subsidiary and partic­ipation in an equity joint venture across intern­ational bounda­ries.

Foreign direct investment can stimulate the target country’s economic develo­pment, creating a more conducive enviro­nment for you as the investor and benefits for the local industry.

Commonly, a country has its own import tariff, and this is one of the reasons why trading with it is quite difficult. Also, there are industries that usually require their presence in the intern­ational markets to ensure their sales and goals will be completely met. With FDI, all these will be made easier.

Foreign direct investment creates new jobs, as investors build new companies in the target country, create new opport­uni­ties. This leads to an increase in income and more buying power to the people, which in turn leads to an economic boost.

One big advantage brought about by FDI is the develo­pment of human capital resources, which is also often unders­tated as it is not immedi­ately apparent. Human capital is the competence and knowledge of those able to perform labor, more known to us as the workforce. The attributes gained by training and sharing experience would increase the education and overall human capital of a country. Its resource is not a tangible asset that is owned by companies, but instead something that is on loan. With this in mind, a country with FDI can benefit greatly by developing its human resources while mainta­ining ownership.

Parent enterp­rises would also provide foreign direct investment to get additional expertise, technology and products. As the foreign investor, you can receive tax incentives that will be highly useful in your selected field of business.

Foreign direct investment will allow resource transfer and other exchanges of knowledge, where various countries are given access to new techno­logies and skills.

Foreign direct investment can reduce the disparity between revenues and costs. With such, countries will be able to make sure that production costs will be the same and can be sold easily.

The facilities and equipment provided by foreign investors can increase a workfo­rce’s produc­tivity in the target country.

Another big advantage of foreign direct investment is the increase of the target country’s income. With more jobs and higher wages, the national income normally increases. As a result, economic growth is spurred. Take note that larger corpor­ations would usually offer higher salary levels than what you would normally find in the target country, which can lead to increment in income.

As it focuses its resources elsewhere other than the investor’s home country, foreign direct investment can sometimes hinder domestic invest­ment.

Because political issues in other countries can instantly change, foreign direct investment is very risky. Plus, most of the risk factors that you are going to experience are extremely high.

Foreign direct invest­ments can occasi­onally affect exchange rates to the advantage of one country and the detriment of another.

If you invest in some foreign countries, you might notice that it is more expensive than when you export goods. So, it is very imperative to prepare sufficient money to set up your operat­ions.

Consid­ering that foreign direct invest­ments may be capita­l-i­nte­nsive from the point of view of the investor, it can sometimes be very risky or econom­ically non-vi­able.

Remember that political changes can also lead to exprop­ria­tion, which is a scenario where the government will have control over your property and assets.

The rules that govern foreign exchange rates and direct invest­ments might negatively have an impact on the investing country. Investment may be banned in some foreign markets, which means that it is impossible to pursue an inviting opport­unity.

Many third-­world countries, or at least those with history of coloni­alism, worry that foreign direct investment would result in some kind of modern day economic coloni­alism, which exposes host countries and leave them vulnerable to foreign companies’ exploi­tat­ions.