Foreign direct investment (FDI) brings dynamism to the global economy.
Foreign direct investment (FDI) is one that takes place when a natural or legal person disburses capital in a country other than its own with the objective of obtaining a benefit . The concept usually refers to the establishment of a long-term financial or commercial link with the recipient nation of the invested funds.
Before continuing, it is important to analyze the three terms that make up the notion. An investment involves the act and result of investing: placing or using a fund (money or another type of asset). When investing, an expense is postponed and the capital is allocated to an operation that allows profits to be made over a certain period of time.
The foreign , meanwhile, refers to a territory that is not one's own. Something direct , finally, lacks intermediations and is directed immediately or directly to a goal.
What is foreign direct investment (FDI)
The idea of foreign direct investment usually refers to the initiative of a foreign investor who aims to create an extensive relationship with the country that receives his funds . In a broad sense, foreign direct investment is formed with the sum of the capital that foreign investors place in a certain place.
Generally, it is understood that FDI is established when there is an investment that enables the acquisition of a lasting participation in a business or company that operates in a national market different from that of the investor. Regarding said participation, it is usually accepted that it must represent 10% or more of the company's capital .
This type of investment is positive for the receiving nation since it contributes to economic development . It allows for job creation, encourages technology transfer and promotes exports with the consequent earning of foreign currency . FDI, in turn, encourages competition and expands the range of options available to consumers.
For the investor, meanwhile, the mission is to achieve profits once the investment is recovered. When such a flow of profits becomes sustained, FDI is maintained and renewed.
Multinational companies are protagonists of foreign direct investment.
How to specify
FDI can be carried out in different ways. Through mergers and acquisitions , a foreign investor can begin to operate in a market , for example.
Franchises are also a possibility. This system has the advantage of reproducing an already proven business model, although success is never guaranteed because it depends on multiple environmental factors.
The exploitation of natural resources , to mention another alternative, can lead an investor to start a project abroad from scratch. For this type of venture, it is necessary to have the support of the State where the investment is destined.
The mining sector and the telecommunications industry often receive foreign direct investment.
Promotion of foreign direct investment
A State can encourage FDI in multiple ways. Thanks to globalization , the circulation of capital is increasingly common, with which authorities can appeal to foreign investment to improve their balance of payments.
A free trade agreement and a tax exemption program are resources used to boost foreign direct investment. The creation of free trade zones and a privatization plan are also tools. Many times, a government considers that FDI can cooperate in infrastructure development and innovation.
The investor's decision
The investor's decision when defining where to allocate the capital is due to different factors. Specialists usually mention the investment climate , formed by the conjunction of these variables.
Political stability is essential. Investors demand legal certainty and clear and constant legislation, with capital-friendly financial regulation. They also usually analyze what measures may affect the repatriation of profits .
An indicator that investors frequently study is country risk . This index is generally based on the Emerging Market Bond Indicator ( EMBI ), which is compiled by JP Morgan Chase based on the progress of each nation's external debt.
Negative effects of foreign direct investment
Beyond the potential benefits of foreign direct investment, the mechanism can also generate negative effects . In any case, it must be considered that the assessment is subjective since the results can be estimated in different ways and, at the same time, they can be good for one sector and harmful for others.
Sometimes, it is noted that FDI affects working conditions . There are companies that take advantage of the poor protection of labor rights in a country to develop practices that they cannot carry out in their country of origin. This means greater precariousness for workers. In the same sense, FDI can take advantage of the lack of environmental protection .
Another point of view is that foreign direct investment, in some cases, does not allow the growth of local businesses . Due to the exchange rate, a company that arrives from abroad may find it easier to operate in a market, harming local entrepreneurs.