Page 113 - DMGT545_INTERNATIONAL_BUSINESS

International Business

notes 6.4 foreign Direct investment (fDi)

Foreign direct investment is direct investment into production in a country by a company located
in another country, either by buying a company in the target country or by expanding operations
of an existing business in that country. Foreign direct investment is done for many reasons
including to take advantage of cheaper wages in the country, special investment privileges such
as tax exemptions offered by the country as an incentive to gain tariff-free access to the markets of
the country or the region. Foreign direct investment is in contrast to portfolio investment which
is a passive investment in the securities of another country such as stocks and bonds.
As a part of the national accounts of a country, and in regard to the national income equation
Y=C+I+G+(X-M), I is investment plus foreign investment, FDI refers to the net inflows of
investment (inflow minus outflow) to acquire a lasting management interest (10 percent or more
of voting stock) in an enterprise operating in an economy other than that of the investor. It is the
sum of equity capital, other long-term capital, and short-term capital as shown the balance of
payments. It usually involves participation in management, joint-venture, transfer of technology
and expertise. There are two types of FDI: inward foreign direct investment and outward foreign
direct investment, resulting in a net FDI inflow (positive or negative) and “stock of foreign direct
investment”, which is the cumulative number for a given period. Direct investment excludes
investment through purchase of shares. FDI is one example of international factor movements.
Foreign firm needs a control the operation when:
1. It has foreign firm’s need to control the operations when it has subsidiaries to achieve
strategic synergies.
2. The technology, manufacturing expertise, intellectual property rights have potentialities
and their full utilization needs planned exploitation.
6.4.1 advantages of fDi

The following are the advantage of FDI:

1. Mostly the customer on host country prefer the products produced in their country
like: be Indian, buy Indian. In such cases FDI helps the company to gain market through
this mode rather than other modes.
2. Purchase managers of most of the companies prefer to buy local production in order to
ensure certainty of supply, faster services, quality dependability, and better communication
with the suppliers.
3. The company can produce based on the local environment and changing preference of the
customers.

6.4.2 Disadvantages of fDi

The following are the disadvantages of FDI:
1. FDI expose the company to the host country’s political and economic risk.
2. FDI expose the company to the exchange rate fluctuation.
3. Some countries discourage the entry of foreign companies though FDI in order to protect
the domestic industry.
4. Changing government policies of the host country may create uncertainty to the
company.
5. Host country government sometimes bans the acquisition of local companies by foreign
companies; impose restriction on repatriation of dividends and capital. India has allowed
100% convertibility.

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