Learn what foreign direct investment (FDI) means with clear examples. Understand how companies invest directly in foreign assets and operations. If you want to understand about the global business dynamics, then it is necessary to understand the foreign direct investment.
This is because foreign direct investment plays a very important role in accelerating the success of your business. Please get to know about FDI and its various types. By understanding different types of FDI, you will be able to make a good start in your business.
Understanding Foreign Direct Investment
Foreign direct investment occurs when any company or a single person invests in a business. It is not only about purchasing any bonds or stocks from foreign countries. Rather, it is all about setting up a complete business with lasting interest.
This FDI includes active participation from the businessman in the operations and management of foreign businesses. In this, there is a complete recommendation to manage the financial assets, which makes it preferable to achieve success in various types of businesses.
Types of Foreign Direct Investment
While understanding the various types of foreign direct investment, you can easily get to know in which time you should invest.
Horizontal Foreign Direct Investment
This type of foreign direct investment occurs when a company replicates its domestic operations in any other country. A business brand chain opens its new branch in any other country that describes the same operations and services as in the origin country.
So this type of investment is known as horizontal FDI. The most common examples include McDonald’s and Amazon, which has started its operations in numerous countries.
Vertical Foreign Direct Investment
In the case of vertical foreign direct investment, a company or an individual invests in any foreign operation that is a part of its supply chain. It means that the business brand having a car business can easily invest in a company that is comprised of the relative parts from the cars manufacturing.
Conglomerate Direct Investment
The conglomerate foreign direct investment occurs when any brand invests in a different industry and also in any other country. For example, if any technology fund has good sales in a specific country but is now investing in a foreign food industry, then it will be known as conglomerate FDI. In this, a specific business is investing in a totally different industry than in any other country.
Platform Foreign Direct Investment
The platform foreign direct investment includes investing in a country for exporting your services or goods to any other market. In this, the brands can easily serve their clients in any other market.
Benefits of Foreign Direct Investment
Here are some of the benefits associated with foreign direct investment.
Economic Growth
The foreign direct investment can easily enhance the economic growth of any country. This can be done by increasing the employment opportunities and production of various important products. Moreover, the capital flow is also increased, and with the increase in all aspects, the economic development of a country is boosted.
Job Opportunities
Different businessmen and brands create numerous opportunities for employment. It can be created both directly and indirectly in the case of foreign direct investment. With the help of this FDI, the brands can easily increase the workflow, which will have a direct impact on the jobs. So, the job creation will be increased with the help of FDI.
Technology Transfer
Foreign direct investment helps you in bringing advancement in technology. Along with this, numerous technical skills are enhanced after a successful FDI. So, local businesses can easily adopt the advanced technology due to the foreign direct investment from different countries.
Infrastructure Development
Numerous foreign companies invest in the infrastructure, including utilities, road building, and ports. These infrastructure developments help in increasing the economy. Along with this, foreign direct investment also has a big impact on supporting the economic growth of any country.
Access to the International Market
With the help of foreign direct investment, local companies can easily get access to the international market. Moreover, in the large global market, local companies can easily make the partnership or provide a supply chain, which will help in providing benefits to both parties. This will also help in increasing the revenue for the business and will have a direct impact on the success of any country.
Increase in Exports
Foreign companies produce goods that help increase exports. This also has a big impact on strengthening the trade between the countries.
Challenges Associated with FDI
There are various services and challenges associated with every type of investment. So, considering the foreign direct investment, there are several challenges which are described below:
- There are big multinational companies that can destroy local businesses.
- Changes in the policies of government can cause political risk and also cause instability which can be risky for the investors.
- Foreign direct investment can have domination of the foreign culture, which will reduce the local traditions.
- It can also have an impact on the environment where foreign companies can exploit the natural resources.
- Countries where there are fewer labor laws can offer poor working conditions for the people.
- FDI also focuses on the urban areas. So, there will be a big gap between the rural and urban areas.
- The FDI is not a long-term investment, so it can also be considered an unstable investment.
FAQs
1. How does foreign direct investment have an impact on the economy of the host country?
Ans. The foreign direct investment has a big impact on the economic stimulation, technical advancement, and job creation. So, relying on this investment has a negative impact on the local business.
2. What are the risks of FDI for investors?
Ans. The regulatory changes, cultural impact, currency fluctuation, and political instability can be the possible risks of foreign direct investment.
3. Can individuals also take part in the FDI?
Ans. Most large corporations are involved in FDI. But then individuals who have a very high net worth can also engage in FDI.
Wrapping Up
Considering which of the following is an example of foreign direct investment, then McDonald’s is leading. If McDonald having its origin in America, opens another branch in Japan, then it is a perfect example of FDI. So, by understanding foreign direct investment, you can get to know about the economy of the world. This will help in moving your money along with building a good wealth for yourself.