Definition of Foreign Direct Investment (Investopedia, 2024)
Foreign direct investment (FDI) is an ownership stake in a foreign company or project, usually made by an investor, government, or company from another country. FDI is critical to international economic integration, creating more stable and long-lasting links between economies. While it may involve capital investment, FDI can also include management, technology, and equipment provision. One of the most well-known examples of FDI is China's One Belt One Road initiative. The program involves China’s commitment to FDI in infrastructure programs, mainly throughout Asia and Africa.
A few key determinants are needed for host countries to receive FDI inflow. Policy frameworks like economic, political, and social stability and privatization policies are required. Additionally, various types of FDI only work with specific economic determinants. The first is market-seeking FDI; this involves market size and growth, access to regional and global markets, and country-specific consumer preferences. The next type of FDI is resource or asset-seeking; host countries need raw materials, low-cost unskilled and skilled labor, and technological innovations. The last type of FDI is efficiency-seeking; this requires low production costs, economies of scope, and specialization.
How does FDI affect economies in developing countries?
Investing in a developing country is more profitable due to low prices and lenient regulations. During financial crises, FDI has also proven resilient in developing countries compared to other forms of private capital flow like portfolio equity. In recent decades, there has been an increase in FDI over portfolio investments. Thus, FDI has become an essential source of private external finance for developing countries. Not only does it involve investible resources and and capital formation, FDI is also a means of transferring technology, knowledge, skills, and innovative capacity, and allows developing countries to access an international market. As a result, developing countries have an enhanced workforce with increased productivity and better-paying jobs.
However, FDI is not all good news. As annual FDI increases in developing countries, it also enhances energy and mineral resource depletion. Thus, underdeveloped nations are left to deal with consequences like pollution and waste, while wealthy countries can enjoy high consumption levels at low costs.
Reference List
Caycedo, S. (2018). Foreign direct investment in developing countries: A blessing or a curse? [online] Yale Environment Review. Available at: https://environment-review.yale.edu/foreign-direct-investment-developing-countries-blessing-or-curse [Accessed 1 Jun. 2024].
Hayes, A. (2024). Foreign Direct Investment (FDI). [online] Investopedia. Available at: https://www.investopedia.com/terms/f/fdi.asp [Accessed 1 Jun. 2024].
Investopedia. (2024). Foreign Direct Investment (FDI): What It Is, Types, and Examples. [online] Available at: https://www.investopedia.com/terms/f/fdi.asp [Accessed 11 Jun. 2024].
Mallampally, P. and Sauvant, K. (2019). Finance and Development. [online] Finance and Development | F&D. Available at: https://www.imf.org/external/pubs/ft/fandd/1999/03/mallampa.htm [Accessed 1 Jun. 2024].
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