Foreign Direct Investments are investments in a company based in a different country than the buyer. These investments are typically much larger than normal stock trades, as FDIs are considered to be a sizable stake in the company – enough to have some influence.
So, my purchase of 1 share in Alibaba is not considered to be a foreign direct investment. A company based in Germany that acquires a company based in France would be considered a foreign direct investment.
In this article, we’re going to go over exactly how FDIs work and why they are important to the global economy.
How exactly do FDIs work?
Foreign direct investments typically only happen in open economies, as FDIs in companies that lie in more restrictive countries come with greater risk without much benefit. Some notable countries and regions of the world that see a lot of foreign direct investments are: Africa, East Asia, and Europe.
There are a few methods of foreign direct investments. For example, a company doesn’t necessarily need to acquire or invest in a foreign company. They could open up a new headquarters or a subsidiary business in a different country, and that would still be considered a foreign direct investment.
Investors can also complete foreign direct investments by acquiring voting rights in a foreign company, doing joint ventures with foreign companies, or completing a merger or acquisition with them.
Pros of FDIs
There are a lot of benefits to foreign direct investments. The most obvious one is the direct inflow of cash and other assets to the recipient country’s economy. These investments particularly benefit countries that lack important resources.
A lot of times, FDIs don’t consist entirely of cash. They often consist of new equipment relevant to the business of the foreign company, and other resources to help the business grow. Because of this, foreign direct investments open up the opportunity for new advances in technology to be shared between countries much more easily.
Some additional benefits of FDIs include: diversification for investors, competition in the local economy, and more jobs.
Cons of FDIs
One of the most potentially dangerous and detrimental aspects of FDIs is the level of control it gives foreign investors in the respective companies they have invested in. For this reason, many countries have strict regulations and laws surrounding foreign direct investments, as they do not want to allow foreign ownership of their important industries.
In addition to this, foreign investors have less attachment and motivation to keep the business running. They may not know as much about the general business of the company and industry, and may seriously hurt the business’s profits.
Also, huge companies like McDonald’s that open up chains in foreign countries tend to disrupt the local lifestyles of the residents in the countries.
Wrapping It Up
A foreign direct investment is considered to be a purchase of a large stake in a foreign company, enough to have some influence over decisions. Another method of foreign investments is creating subsidiaries of domestic companies in foreign countries.
