Foreign direct investment - Research Paper Example

Lastly, the paper winds down with a thorough discussion of the political and economic reasons that inform governments’ need to intervene in the international trade. Foreign Direct Investment In every economy, the government of any given country defines the benchmark of political, social and economic leadership of that particular country. Government strategizes and sets legal mechanisms intended to drive the given country into ultimate prosperity. Economy is one of the most essential tools used by potential political contestants and prevailing governments to maintain and construct leadership by use of their individual economic policies.

The direction of economic policies chosen by a government determines the nature of foreign relationships enjoyed with other nations to be affected by the set policies. Foreign Direct Investment (FDI) is one aspect of the economy that is capable of dictating the foreign relationship to be enjoyed between or among partnering nations. Foreign Direct Investment occurs when a given business institution from a given country opens or transfers its operations to another foreign country (Kuepper, 2012).

The main advantages of FDI are creation of new job opportunities for the host or receiving economy, and increase in tax margins received by the host government. FDI carries with it integrated technology and technical experts to the host country, which is usually in the class of developing countries. Despite its advantages, FDI being a form of investment from another country, tend to create a lot of discomfort on the recipient economy if not regulated. Kuepper (2012) indicates that one of the fears necessitate government’s intervention revolves around the fate of the domestic industries in the face of foreign direct investment.

It is a normal practice in business that for any new entrant to survive in the foreign market, it has to offer its goods and services at relatively lower prices than the existing firms. The new entrant may also have to enhance the quality of its products and services to compete the existing ones to an extent of leading to closure of the local firms. These possible practices pose significant threats to the domestic firms, which justifies the role of government to set sustainable policies to foresee equitable sharing of the market and raw materials to the benefit of the entire economy.

Technology, trademarks and patent rights are of great essential to the operation of any world class or highly innovative firm. Foreign firms lobbying for FDI may prove risky when it comes to technological leaks, breach of patent rights and misuse of established trademarks. To cushion the domestic firms from the negative effects of FDI, government’s involvement in the FDI will play a great role as it will help in protecting and defending the local firms. In addition, FDI are known by many governments as among the strategies to raise national income and government’s revenues.

Government’s intervention is of great importance as it helps in the computation and determination of tax margins to impose on the arriving firms. It is noteworthy that every country has certain unique economic policies enforced on the local business institutions and organizations. Businesses investing in other foreign countries are likely to carry with them operational laws used in the original country. Some