Foreign Direct Investment

Topics: Investment, Foreign direct investment, Macroeconomics Pages: 3 (769 words) Published: June 12, 2011
Foreign Direct Investment (FDI)
Due to globalization and hyper competition, it became crucial for the countries to engage in the global economy in order to survive and develop. One way to do so is through foreign direct investment.

“Foreign direct investment (FDI) occurs when a firm invests directly in production or other facilities in a foreign country over which it has effective control”. (Shenkar & Luo, 2007, p. 60). It provides benefits for the multinational enterprises investing in a foreign country and for the host countries.

Benefits for the Multinational enterprises:

From investing in a foreign country, the MNE can have access to resources, cheap labor cost, new market opportunities, and new skills, thus, the productivity of the MNE will increase. Also, the MNE can benefit from avoiding the costs associated with trade barriers, customs, and tariffs. In addition, MNE benefits from the diversification of its operations. Due to the increased competition and the constant change in the economy, it is crucial for an enterprise to invest in more than one country to maximize revenues, reduce risk, and prosper more quickly. Moreover, MNE can benefit from investment incentives provided by the government of the host country and from flexible regulations. It can also benefit from the structural discrepancy of the host country (i.e. growth, competition, consumer purchasing power). For instance, a company producing air conditioners in Lebanon will not make high profits as the electricity cost is high and the weather is good. However, a FDI in Qatar will generate high profits as the electricity cost is low and the weather is humid. Thus, there will be a higher market demand in Qatar than in Lebanon. Furthermore, according to Shenkar & Luo (2007, p. 65), “FDI expands the market domain in which an MNE capitalizes on its core competencies, generating more income from existing resources, capabilities, or knowledge”. Nevertheless, the MNE gain more...
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