So FDI can create a level of dependency between countries, which in turn can create a level of peace. In other words, if nations are reliant on each other for their income, then the likelihood of war is also reduced. Foreign direct investment allows the transfer of technology, knowledge, and culture.
For instance, when a firm from the US invests in another from India, it has a say in how the firm is run. It is in its interest to ensure the most efficient use of its resources.
What happens as a result is that useful techniques or ways of conducting business are transferred. By coming in from a different cultural background and perspective, often, efficiencies can be achieved. Furthermore, there is the case of technology. It can transfer over in a number of ways. First of all, employees benefit from having first-hand access to the new technology. They may then be able to use this to start their own ventures. Second of all, the technology could be outright purchased from a foreign nation.
Finally, the technology could be reverse-engineered or provide inspiration for domestic development. From the businesses perspective, foreign direct investment reduces risk through diversification.
By investing in other nations, it spreads the companies exposure. In other words, it is not so reliant on Country A. For instance, Target derives its entire revenues from the US. By diversifying and investing in foreign markets, it allows businesses to reduce domestic exposure.
So if a US firm invests in new stores in Germany, the level of risk is reduced. This is because it is not reliant on one market. Whilst there may be a decline in demand for one, there may be growth in another. Foreign direct investments can benefit from lower labor costs. Often, businesses will off-shore production to nations abroad that offer cheaper labor. Now there is an ethical element to this than is often debated, but we will leave that aside for now.
Whether it is ethical or not is irrelevant as it is a benefit to the business. Although labor costs are lower, we must also consider productivity. With that said, foreign direct investors will take such factors into account. And in most cases, the labor is so much cheaper than most of the productivity differentials are eliminated. This means the investment is cost-effective.
In other words, more employees will be needed to make the same number of goods, but the total cost to produce is lower. On most occasions, foreign direct investment will result in a net gain for the company. On the other hand, a merger is when two businesses team up to move forward as a single new entity, rather than remain separately operated and owned.
Greenfield FDI Not all foreign investors want to merge with or acquire a pre-existing business, opting rather to establish a completely new cross-border entity themselves. This is greenfield FDI.
Google setting up its European headquarters in Dublin is another. This is why greenfield FDI is arguably the crown jewel of the foreign investment world, the type of foreign investment that governments are most keen to attract. These are two very different concepts. In real estate, a greenfield investment is when a developer constructs a building, quite literally, from the ground up be it domestically or abroad. It may become confusing, therefore, when using this real estate jargon alongside FDI jargon.
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I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. Markets International Markets. Table of Contents Expand. How FDIs Work. Special Considerations. Types of FDIs. Foreign direct investments FDI are substantial investments made by a company into a foreign concern. The investment may involve acquiring a source of materials, expanding a company's footprint, or developing a multinational presence.
As of , the U. FDI is generally a larger commitment, made to enhance the growth of a company. Article Sources. Investopedia requires writers to use primary sources to support their work. You also have the option to opt-out of these cookies. But opting out of some of these cookies may affect your browsing experience. Necessary Necessary. Necessary cookies are absolutely essential for the website to function properly. These cookies ensure basic functionalities and security features of the website, anonymously.
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