Introduction to Foreign Direct Investment
Foreign direct investment (FDI), in its simplest term, is when a company from one country makes an investment into building a facility in another country, or when investments are made in order to acquire a certain stake in enterprises operating outside the economy and country of the investor. FDI plays an extraordinary role for firms wanting to operate and compete in a global business. It can provide a firm with new markets to penetrate, cheaper production facilities, access to new technologies, skills, and financing. For a host country or the foreign firm receiving the investment, it can provide many opportunities that are necessary for economic growth and development. FDI can also come in many different forms, such as direct acquisition of a foreign firm, setting up a facility in a foreign country, or investing in joint ventures and/or strategic alliances with local and foreign firms (Kim & Kim, 2006). In the past decade, due to a dramatic change in the way businesses are conducted, combined with loosening of governments’ regulations on foreign investments, FDI has increased dramatically on a global scale. When companies make decisions regarding FDI, this process require the efficient allocation of funds to investment opportunities, which often require large amounts of money that will hopefully bring greater returns to its investors. With foreign investments being far riskier than domestic investments, the effective and efficient use of funds is critical for the future performance of a multinational company. Multinational companies that engage in FDI provide a range of potential benefits that extend to the actual investors as well as the host country that is receiving the investment which are quite apparent. An example within many of these advantages include, increased profits for the industry or the firm due to lower costs of resources abroad, and increase in jobs provided in the host country. However, despite the positive arguments for FDIs there are still also many reasons how or why these type of investments can prove to be harmful. Domestic firms may consider these investments as unfair competition because the home-market is losing jobs that are instead being set-up abroad. Also, the host country may feel that they are losing their national identity due to foreign cultures and influences being imposed on them.
Despite the many benefits that FDIs have provided both companies and host-countries, it is still unsure that such activities will not extend harmful effects to either participant due to the various reasons mentioned above. A reasonable outline for investments should be set-out in order to allow investors reap the benefits of their investments, while simultaneously contributing positively towards the growth and development of the host-country. The following sections of this report will attempt to analyze FDI effects on developing countries, the means available for companies to invest in foreign markets, mergers and acquisitions, and other issues related to the field of foreign direct investment. Foreign Direct Investment in Developing Countries
Foreign direct investments initiated by MNCs occur primarily because in most cases these type of activities aim to fulfill all MNC’s primary objective; to maximize shareholder value (stock price) by “taking-on” various value-adding activities or investments. As such they are considered as being major contributors to economic growth for developing countries. A host country will usually want to attract foreign investors in order to acquire additional resources such as capital, new technologies, knowledge, as well as increased job opportunities for its population. Over the past decade globalization has increased dramatically, which has also sparked increasing flows of FDI in developing countries as governments begin to ease up on their regulations. According to publications from the Institute for International...
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