Foreign direct investment (FDI) – Explained + Examples

Foreign direct investment (FDI) refers to when a company or individual invests money in a business or enterprise located in a foreign country. The investor gains partial or full ownership of the foreign business and can participate in its management and decision-making processes.

FDI is typically undertaken by multinational corporations (MNCs) seeking to expand their operations globally or gain access to new markets. It can take many forms, including the establishment of new subsidiaries or the acquisition of existing foreign businesses.

FDI can benefit both the investor and the host country. The investor gains access to new markets, resources, and technologies, while the host country can benefit from job creation, economic growth, and the transfer of skills and knowledge.

However, FDI can also raise concerns about issues such as national sovereignty, labor standards, and environmental impact. Host countries may require that certain conditions be met before allowing FDI, such as requiring the investor to use local labor or invest in local infrastructure.

Overall, FDI is an important aspect of the global economy and can bring significant benefits to both investors and host countries, as well as some potential challenges that need to be managed effectively.

Examples of how foreign direct investment (FDI) can work in different scenarios:

1. Multinational Corporations: A large tech company based in the United States decides to invest in a software development firm in India to gain access to a highly skilled workforce and take advantage of lower labor costs. The US company acquires a controlling interest in the Indian company and begins to participate in its management and decision-making processes.
2. Greenfield Investment: A Japanese car manufacturer decides to build a new factory in Mexico to take advantage of the country’s favorable business climate and proximity to the US market. The Japanese company invests money to construct the new facility, hires local workers, and begins to produce cars for export.
3. Joint Venture: A British pharmaceutical company decides to partner with a Chinese firm to develop and manufacture a new drug. The two companies agree to invest money in a joint venture, with each holding a 50% stake in the new enterprise. They share the costs and risks of developing the drug, and both benefit from the resulting profits.
4. Acquisition: A Canadian mining company decides to acquire a mining company in Chile to gain access to a new copper deposit. The Canadian company buys a controlling interest in the Chilean company and begins to participate in its management and decision-making processes.