What Is Foreign Direct Investment (Fdi)?

Topics: Foreign direct investment, Investment, Development Pages: 9 (2851 words) Published: November 8, 2008
What is FDI?

1) FDI is not only beneficial to certain individuals of the society; it is spread through out the economy via the theory of the multiplier effect. As workers of an investing firm are paid their wages, they would decide to spend it on their essential needs, which in turn, become the income for other certain individuals. This cycle is repeated, known as the multiplier effect. This ultimately boosts the economy of Thailand raising its standard of living.

2) This investigation will examine the positive and negative implications of Foreign Direct Investment (FDI) on the host countries as well as the investing companies. This study will also touch upon the differences FDI makes for developed countries as well as low economically developed countries (LEDC’s).

Foreign Direct Investment is defined as ‘any equity holding across national boarders that provides the owner substantial control over the entity’ (see Appendix A). This is generally defined as a 10% holding or greater. Most FDI ends up being 100% ownership by a Multi-National Corporation (MNC). FDI has increased dramatically in the past twenty years (see Appendix B need 2 find!), to become the most common type of capital flowing across borders in both developed and developing economies. For the most part politicians and economists welcome the increase of FDI to developing economies. It brings capital needed for economic development in the country in a way that is not as risky as borrowing from overseas. It may also bring a range of additional benefits. However there is conflicting evidence about the real world effects of FDI, which will be analysed during the course of this essay.

Firstly, this investigation will look at the positive and negative implications on the host country.

The positive consequences of FDI on the host nation

To examine the consequences of FDI on the host country, this report will single out the benefits of FDI to a ‘developing country’. Foreign Direct Investment has come to be officially encouraged by governments, many of which have formal FDI promotion programs (see appendix B). Governments sometimes provide substantial incentives to companies locating in their countries. This suggests that FDI is generally good for the host country and presents a sound argument in FDI’s favour. The empirical evidence is good that FDI often, though definitely not always, contributes to economic growth. It can be said that this economic growth effectively reduces poverty within the host country, though not necessarily to a more equitable distribution of income. FDI is generally comes from multinational corporations, and these companies are concerned with making investments that will create profits. Therefore, their investments are usually well targeted towards setting up a business that will make money and create jobs. This contrasts especially with aid and loans to governments, which have often been squandered through corruption or spent inefficiently on unneeded infrastructure or other ‘vanity’ projects. Figure 1 is table showing Gross Domestic Product as well as Foreign Direct Investment in the years 1985 to 2001.

As the chart shows FDI is important for china’s continued economic growth (not necessarily more important than several other influences, but nevertheless highly important). As the level of FDI increases so does the figure for china’s GDP, they also seem to grow at a similar rate. Although there may well be other factors for this growth the importance of FDI in China’s rapid economic growth cannot be denied.

FDI is beneficial as it is generally spent on ‘hard assets’ such building factories and equipment, the capital embodied in FDI cannot flee a country in time of crisis as easily as debt capital. A company cant sell off a factory and pull out of the country as quickly as a bank can sell off the countries bonds, or refuse to roll over short term loans. An example of debt capital...
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