Foreign Direct Investment (FDI)

Foreign Direct Investment (FDI)

FDI characterizes investments made in a different country than the one where the funds invested came from. In the case of a Foreign Direct Investment, the asset purchased must be of a dissimilar nation state than that of the investor’s home. The FDI can take the form of financial, technological and even human capital (such as skills development or knowledge). By definition, there must be a lasting management interest around 10% of voting shares (more or less). Generally, FDI is classified as vertical, horizontal and conglomerate.

The vertical type can be further subdivided into forward and backward.

Apparently despite the sharp rise in the 1980s and 19990s, the stimulating effect of FDI influenced economy in many countries. In the first decade of the new millennium, Foreign Direct Investment underwent exponential growth thanks to cross-border companies.

However, its positive effect on developing economies continues to be debated. The optimistic school of thought rests on the neoclassical perspective and the new theory of economic growth, but negative radicalism is characterized by pessimism. Indeed possibility exists that such capital brings about crowding out effects domestically, loss of autonomy and distress to local business.

Foreign Direct Investment aas a means to create industries. Illustration: Megan Jorgensen (Elena)

Today FDI stock amounts to 1/5 of the global GDP. The reverse pattern, capital flow outwards from developing countries, also went up.

We should also draw attention to what distinguishes FDI from portfolio investment: FDI is designed for longer term and control of the assets acquired. The issue is surrounded by controversy, some seeing it as almost a new form of colonialism or imperialistic expansion. Still, FDI plays a major role in growth and economic development of what is still called the Third World and is one of the most stable international investment resources.

There exist other forms of foreign investment than FDI. Notwithstanding, suprisingly resilient, this form of investment persisted almost unchallenged during the worst world financial crisis, and everyone agrees about FDI furthering economic growth by modernizing the host’s technology, infrastructure, bureaucracy and so on.

We should also underline the repercussion of spillover effects of a technological nature. Figures can be provided demonstrating the more pronounced positive correlation between FDI and business development, than between business growth and domestic investment throughout the world. In Latin America, in Asia, in Africa domestic influx begins to play a greater and more constructive role. Furthermore, it appears that the receiver country must be developed up to a certain point in order to be able to benefit from the arrangement.

References:

• Caves, R. E. (1971). International corporations: The industrial economics of foreign investment. Economica, 38 (149): 1-27.
• Moosa, I. A. (2002). Foreign direct investment: Theory, evidence and practice. Palgrave: New York, NY.
• Wan, X. (2010). A literature review on the relationship between foreign direct investment and economic growth. International Business Research, 3 (1): 52-56.