Foreign Direct Investment

Foreign Direct Investment

Table of Contents

Foreign Direct Investment3

Introduction3

Definition3

FDI From A Historical Perspective5

Historical Shifts in FDI and Why?5

Current FDI Flows Worldwide6

Developing Nation FDI Flows8

Future Projections For FDI Flow9

Shifts In Patterns Of FDI Flow Worldwide9

Modes13

Costs13

Trade Policies13

Some Comparative Advantages14

Business Cycle Effects14

Conclusion15

References17

Bibliography19

Foreign Direct Investment

Introduction

It has become an important development tool for both developed and developing countries to attract foreign direct investment (FDI). Most investors of foreign investment have been attracted from the developed countries of the world, in industrial sectors such as large, technology-intensive enterprises as well as in the service sectors such as banking, insurance and lately call-centres. This leads to the question of why enterprises do choose to enter foreign countries and as such go abroad as investors. The answer to this is simply that such enterprises need to expand new markets, remain competitive and increase production - to maintain growth and profitability.

Furthermore one wonders why FDI occurs in some counties and in some industries, and not in others. The destination of foreign direct investments is an outcome of multiple factors and therefore hardly a predictable subject. Individual investors that are active in specific industries and in particular countries might have a different response to the host market as well as the local investor.

Definition

Foreign direct investment (FDI) occurs when an entity/investor from one country (home country) obtains or acquires the controlling interest in an entity in another country (host country), and then operates and manages that entity and its assets as part of the multinational business of the investing entity. FDI are then financed through the transfer of funds from the parent company to the new affiliate, as well as by borrowing from lenders in the home country or in the host country, or any combination of these funding vehicles (Prest 2006 p 778).

Foreign Direct Investment is something that has been growing in the last two to three decades, for example United States investment in capital abroad in the manufacturing industry was worth $1,819 million at the beginning of 1982 but by the beginning of 2002, that figure had risen to $5,892 million. The level of growth of FDI has not only grown for the United States but the world over, for developed and developing countries. The average yearly outflow of FDI increased from about £ 25 billion in 1975 to a record $430 billion in 1998. Between 1984 and 1998, the total flow of FDI from all countries increased by over 900 percent, while world trade grew by 121 percent and world output by 34 percent" (Friedman; Gerlowski & Silberman 2002 pp.403-18).

FDI from A Historical Perspective

FDI flow has been primarily focused on developed nations. These nations get the majority of the flow of FDI. Developed nations dominate giving FDI as well as receiving. An obvious reason for this is that the more financially established a country is, the more likely it'll have money to invest abroad. The United States has been the biggest giver and receiver of FDI worldwide for the last several decades (Knittel 2007 ...