Foreign Direct Investment (FDI)

Our topic today? Foreign Direct Investment, also known as FDI. Vocabulary Economic territory: the areas under the effective economic control of a single government. Residence: the economic territory where the enterprise has its main economic interest. Foreign Parent: A foreign parent an owner residing outside the host country which has at least 10 percent ownership in the enterprise. Inward Flow: This measure captures FDI from one market to the host country. Outward Flow: This measure captures FDI from the source to a foreign country. Discussion Most economists agree that foreign direct investment (FDI) is beneficial for the economic development of the host country –– and by “host country”, I mean the economic territory that receives the investment. The benefits of FDI are many and can include the creation of new jobs, especially if the investment is used for the construction of new projects. Also, for developing economies, FDI can be key for bringing new technology into the country. Some countries benefit more from FDI than others because the nature of the investment can create an important multiplier effect, for example through the use of local production of materials for construction. It is possible to identify the direct impact of FDI on economic development through the national accounts, however FDI could also have many indirect impacts that are more difficult to capture––such as the development of human capital. Generally speaking, developing economies receive a net inward flow of FDI and developed economies a net outward flow. That makes sense, richer countries invest in poorer countries where local funding is scarce. For example, in a country with plentiful natural resources, a large investment could be necessary to develop them. What can be some of the disadvantages of FDI? The disadvantages of FDI could be that the revenues from the investment don’t necessarily stay in the economic territory, but rather flow across the border to the foreign parent. Depending on the scale of the economy of the host country, the outward flow of profit remitted to the foreign parent can even provoke a trade deficit. Vocabulary Review Economic territory: the areas under the effective economic control of a single government. Residence: the economic territory where the enterprise has its main economic interest. Foreign Parent: A foreign parent an owner residing outside the host country which has at least 10 percent ownership in the enterprise. Inward Flow: This measure captures FDI from one market to the host country. Outward Flow: This measure captures FDI from the source to a foreign country.