FDI



FDI

Introduction

With the development of economic globalization, foreign direct investment (FDI) is increasingly being recognized as an important factor in the economic development of countries. Although FDI began centuries ago, the biggest growth has occurred in recent years. This growth resulted from several factors, particularly the more receptive attitude of governments to investment inflows, the process of privatization, and the growing interdependence of the world economy. Foreign direct investment (FDI) occurs when a firm invests directly in facilities to produce and/or market a product in a foreign country (Brealey Steward 2009 ). FDI takes on two main forms; the first is a green-field investment, which involves the establishment of a wholly new operation in a foreign country. The second involves acquiring or merging with an existing firm in the foreign country. On the other hand, FDI is divided into two kinds; horizontal FDI (market-expansion investments) which is investment in the same industry abroad as a firm operates in at home; And vertical FDI (resource-seeking investments), which comprises two forms further; the first is backward vertical FDI investing an industry abroad that provides inputs for a firm's domestic production process. The second is forward vertical FDI in which an industry abroad sells the foods of a firm's domestic production processes(Brealey Steward 2009).

Historical shifts in FDI

There have been numerous shifts in FDI throughout the 20th century. Causes of this vary by situation and time. Before FDI became such a dominant force in globalization, it was trade that was the dominant factor. The primary mechanism of integration has shifted from trade to FDI. Of course, these trends in the growth of FDI, trade and production are not independent of one another. The common element is the transnational corporation (TNC) (Global shift p.52). Wars, politics, technology and new markets opening have all been major factors in shifts. Rapid growth of FDI in the first half of the 20th century paled in comparison to the acceleration that occurred after World War II. In fact during the 1960s, FDI grew at twice the rate of global gross product and 40% faster than world exports (global shift p.52). FDI has been a direct factor in the spread of global prosperity and peace. It has replaced trade as the number one influence in the global community and given prosperity to the poor and underprivileged that would otherwise, never have been. FDI takes two forms: Greenfield investment and cross-boarder acquisitions. Cross-boarder acquisitions involves firms trading heterogeneous corporate assets to exploit complementarities, while Greenfield FDI involves building a new plant in a foreign market (Auty 2001).

Following three years of decline, global FDI inflows are estimated to have increased by six percent in 2004 to $612 billion (Brealey Steward 2009 ) This increase is mainly related to inflows of FDI into developing and transition economies. One reason for this is investment in natural resources. Another is a strong rise in global commodity prices and growing demand for diamonds, gold, oil, platinum and palladium. It is these factors that have helped Africa, ...