Definition of Foreign Direct Investment(FDI)
Foreign Direct Investment (or FDI) is an investment made by a company or entity based in one country, into a company or entity based in another country. Further, Foreign direct investments differ from FIIs ( as portfolio flows), wherein foreign institutions invest in equities listed on a nation’s stock exchange . Entities making direct investments typically have a significant influence and control over the company into which the investment is made. Open & emerging economies with skilled workers and good growth prospects attract larger amounts of foreign direct investment. Example India has a sound knowledge of worker and big market for consumption of goods in the world that makes a good place to direct investment in the world.
The investing company can make his investment in the various mode of ways – either by setting up a subsidiary or associate company in the foreign country, by acquiring shares of an overseas company, or through amalgamation / merger or joint venture.
An example of foreign direct investment would be an American company taking a majority stake in a company in India. Another example would be a British company setting up a joint venture to develop a mineral deposit in Srilanka.
The party that makes the investment is also known as parent company and party invested is called foreign affiliate. Followings are the advantages of the FDI:-
1. In today’s completive market there are many industries that require their presence in the international markets to make sure that their sales and business goals will completely meet & their product would easily recognize in the global village.
2. There are also parent enterprise that provides foreign direct investment to obtain additional expertise, products and technology. As a foreign investor, you will get tax incentives that will be very useful in your chosen field of business enterprise.
3. The foreign direct investment has the ability to reduce the disparity between revenues and cost. In this way, most of the foreign country can be sure that the production costs are the same and can easily be sold.
Even though, the foreign direct investment has excellent advantages, there are also disadvantages that we should take in to consideration.
1. Foreign direct investment is very risky since the political issues in several countries can instantly change due to their strategy for expansion, growth can be effected.
2. Investing in some of the foreign countries is more expensive compared to goods exportation?
3. There are also cases that political changes will lead to expropriation wherein it is a kind of scenario that the government will control your assets and property. Due to there would be impact on your profitability & stability.
At the end, with foreign direct investment, we will completely realize the significance of global world. Further, we found that most of the business opportunities expanded to massive state and this is one of the reasons why we need to seek out for venture and foreign investors who will help us increase our capital budgets, technical expertise and improve our management practices so that we can crate our presence in the today’s competitive market.
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