FOREIGN DIRECT INVESTMENT

Foreign Direct Investment

Reasons for Foreign Direct Investment

Introduction

The study is related to the reason of Foreign Direct Investment. Direct foreign investment, or foreign direct investment (FDI), is long term investment by entities of one country in companies (in another country) through joint ventures, management, or transfer of technology. Foreign ownership of a factory is a common example; when an American corporation opens an auto factory in Mexico or a Japanese corporation opens one in the United States that is FDI. The greatest flow of FDI is among the industrialized countries of North America, Western Europe, and Japan, where foreign ownership of assets and multi-company joint ventures are common (Yeung, 2007, Pp. 1-25). In addition to this, study also focuses on the prominent factors that influence the Foreign Direct Investment. In recent years, FDI flows to developing countries have risen steadily and rapidly. FDI is direct investment in contrast to the indirect investment of shareholding: purchasing stock in a foreign company is not an example of FDI.

One of the main reasons has been offered to explain the presence of FDI in an economy is the search for new markets. Traditionally it was assumed that a company that provided a large economy and / or rich would ensure their participation in the market through direct investment. In that sense, FDI was traditionally understood as a direct substitute for trade. Thus, a factor that explains this type of FDI is the size of the target market, which can be measured by the total income of an economy or by its two components: the population size and income per capita. In fact, some of the traditional explanation of FDI in the sixties and seventies was based on the strong protectionism that characterized some economies. This was because in a protected market was more attractive to invest in directly to use the alternative route (export), which could be very expensive. In addition, a protected economy offered an attractive captive market. This type of FDI is known in English under the name of tariff-jumping. A more modern approach, however, suggests that there is some type of FDI that seeks a bigger market but not directly but indirectly. In this sense, an economy that offers commercial advantages or geographical location, could serve to attract FDI that seeks to penetrate a wider market (for example in a third country, which may be the result of the establishment of trade agreements). In this sense, this type of FDI may be associated with an increased volume of international trade and not a minor as was previously assumed. This paper will discuss the various reasons for Foreign Direct Investment and any of these reasons for Foreign Direct Investment more prominent.

Discussion

Theories of Foreign Direct Investment

There are several theories that attempt to account for foreign aid. The existing ones include Dunning's eclectic approach and the product cycle. John Dunning's eclectic paradigm emphasizes the critical role of geographical location in understanding the complex nature of TNC ...