Foreign Direct Investment - International Business - Essay Example

Foreign Direct Investment In the ever-increasing competition of resources, markets and investments, world economic giants and virtually any economically empowered nation is counting on foreign direct investment (FDI) to promote its economic development. The ability to attract and the quality of foreign direct investment in relation to a country’s economic development vary among nations. This paper will relay the significance of FDI. To achieve this purpose, the paper will define FDI in a business aspect, highlight the types of FDI, and discuss its advantages and disadvantages for the host country.

It will also establish the strategies host countries should pursue to maximize the benefits of FDI in their countries. Foreign Direct Investment from a business point of view is a company’s physical investment in another country. This direct physical investment may be buildings, equipment, and machinery in factories. This physical investment takes the form of direct acquisition of a foreign firm, or joint investment with a foreign firm (Graham and Spaulding Web). The parent company must have at least 10% of the ordinary shares of its foreign affiliates for their invested to qualify as a FDI.

The significance of FDI is certain in any country’s economic development. Recent times have witnessed mega growth of FDI in developing and developed countries. However, developing countries have largely witnessed this where FDI flows have tremendously increased from an average of $ 10 billion in 1970 to $ 208 billion in 1999 as recorded by UNCTAD (Graham and Spaulding Web). UNCTAD further observes that the FDI in developed countries rose from $481 billion in 1998 to $ 636 billion in 2011. This growth draws its attributes to new information technology systems, deregulation, and privatization of industries, changes in trade policy and tariff liberalization, easing in formation of mergers and acquisitions in foreign investments.

The significance flows in both host and home countries as small and medium sized companies get a golden chance to participate in international business. There are five different types of FDI as analyzed in international business policies. One seeks to gain access to specific factors of production, one that seeks to gain access to gain factors of production at a cheaper cost. Another FDI involves a mutual investment by international competitors. The fourth FDI involves the access of customers in a host country market.

The last FDI concerns trade diversification in a regional integration (quncy.com Web). These types apply exclusively. FDI is associated with a various advantages and disadvantages depending on the country. FDI has made it possible for small countries to participate in international business hence increasing their turnover (Graham and Spaulding Web). Foreign government has been able to resist pressure for local production. There has been an increase total production capacity, and opportunities for co-production, licensing, joint ventures and marketing arrangements, as well as circumventing trade barriers.

However, a number of disadvantages relate to FDI. Parent companies face an accusation of dumping poor quality products in host countries. FDI possess great power over smaller and weaker economies, which can drive out local products in host country if not checked. Many resources in form of capital and management are required to facilitate a FDI. For host countries to maximize FDI, they need to carry out a market analysis and substantial research on market of a foreign company before allowing it to invest in their country.

A host country should attract more foreign investors by according them tax incentives on FDI. Conducive business environment for should be guaranteed to the investors maximum exploitation of resources. Mergers with the foreign companies will ensure equitable sharing of benefits. Host nations should make sure that foreign investors abide by the set trade and environmental policies. A signed contract should dictate the terms of agreement putting the interests of the host nation first. . Works Cited Graham, J and Barry Spaulding.

“Understanding Foreign Direct Investment (FDI)”. Web 21, February 2012. Quncy.com “Five Different Types of Foreign Direct Investment (FDI).” quncy.com. Web 21, February 2012.