Discuss the Reasons with Foreign Direct Investment Exists

Topics: Investment, Foreign direct investment, Macroeconomics Pages: 5 (1984 words) Published: March 7, 2013
Discuss the reasons why Foreign Direct Investment occurs.
Foreign direct investment occurs when an international firm based in one country directly involves themselves in another country by expanding their operations. This generally takes place when a company in one country decides to invest into another country by obtaining an existing business in the foreign country, generally known as Brownfield; or creating one from the ground up; this may also be known as Greenfield investment. Additionally, a company may transfer all their business activity to another country; this may be something such as a call centre or a manufacturing plant. The financial investment must be put in place in order to set up the business overseas. In this essay I will consider the reasons behind foreign direct investment and how it is beneficial for the firms to carry out this kind of business transaction using examples from countries that receive substantial foreign direct investment and consider how it benefits them. Furthermore I will consider the reasons behind foreign direct investment and why it is a fundamental part of the global economy. I will review particular examples in various countries to gain a full understanding of inflows and outflows of FDI. In addition to this I will consider how it benefits the businesses involved and the countries involved in order to understand why inflows and outflows of FDI are permitted by governments and in some cases why it is not. To gather a small idea of what foreign direct investment actually means in global business, there are a few easily comprehendible recent examples; firstly, Motorola opened up a manufacturing plant to manufacture cell phones in China, the reason behind this was to take advantage of Chinese advances in technology. Another relevant example is the coffee giant ‘Starbucks’ bought an existing UK firm ‘British Coffee’ in order to easily sell coffee and various other products to the UK, there could be many reasons behind this, but it is likely that Starbucks invested in order to gain sufficient market share in the industry that is expected to grow from £782 million in 5 years to £976 million (Market research world, March 2010). We can understand another form of foreign direct investment by look at Volkswagen; Volkswagen created a joint venture with two Chinese car manufacturers and built a new gearbox manufacturing plant, again the reasoning behind this was to take advantage of their innovative technology and cheap manufacturing costs. It is likely that many international firms participate in foreign direct investment because it allows the corporation to take sufficient control in it operations and can easily monitor the business transactions occurring rather than using a form of indirect investment. Foreign direct investment can be seen as an alternative option to indirect investments or bank loan as firms can seek maximum profit and raise capital by using their own management skills and resources. This type of investment not only occurs for the benefit of the firm, but also to the country benefiting from an inflow of foreign capital and the creation of employment opportunities. By FDI benefiting the foreign country itself, the firm can gain sufficient credibility and feel responsible for the boot in that country’s economy. When research is conducted into foreign direct investment it is clear that multinational corporations participate in FDI to enhance their profits and break into other international markets. But these two reasons indefinitely collide; if an English company opened a shop in China, this would mean the companies were trying to derive profits by exploring the Chinese market. FDI is also fundamental for companies to control the profit margins they are able to create, for example if a drinks manufacturing company were getting their bottles from a supplier and the cost for the plastic manufacturer had risen, they could not gain any control over this circumstance. Whereas...
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