Foreign direct investment act, it’s benefits and examples
For the purpose of beginning new business or investment and gaining more income, individuals or an enterprise in a country partners with another country in a business venture, that is called Foreign direct investment (FDI).
When an investor purchase over 10% stake in foreign companies assets, IMF has it that it is a foreign direct investment.
If the stake purchased is not up to 10%, it is referred to as ‘stock portfolio’. It is the small amount of stocks that the average citizen may have invested.
If I reside in UK and wish to start up a new soap manufacturing company in US with the sum of £2 million, and eventually started it, it is referred as Foreign direct investment.
Types of Foreign Direct Investment (FDI)
This type of Foreign Direct Investment in its own part gives opportunity to big ventures expand and diversify to other types of businesses.
In Conglomerate FDI, investments made are not in the line of the current business which the person or a venture is into. A gold mining company in United States might decide to invest in Electronics production company in China.
Some businesses at the verge of collapsing go for this type of investment in other to survive. Even stable businesses also partner with diverse businesses that boom more than theirs in other to make more money.
Here companies or business ventures invest in business in the same field with the one they’re into already i.e the same category of business as theirs.
For instance Palm Angels clothing in Milan, Italy might invest in Luis Vuitton in Paris, France.
In this type of FDI, the investment is made by a supplier of goods to the venture it supplies to or vice versa.
For instance a company that supplies rubber to a business in a foreign country that produces shoe might like to invest in shoe making in that foreign company.
There exist backwards vertical integration and forwards vertical integration.
Foreign Direct Investment and it’s importance
1. Increases Efficiency and Costs minimized
FDI is beneficial to local nations who shift production to foreign nations , by this, cost of labour is minimized.
The workers where the works are shifted to produces more products at the same time with the local company and are paid on a normal rate, which in the local company, the workers can not produce such amount of products within the specified time and the cost of production will be high thereby making the goods to be costly in the market. But when produced in the foreign country, it will be cheaper as the cost of production is cheap.
2. It waters International Trade
It is a lubricant to production as it aids flow of production to segments in the world and are cost effective.
For instance iPhones are produced in China due to the Foreign Direct Investment entered into with them by Apple company. So are many other companies entering into Foreign Direct Investment with Companies in other countries.
Due to this initiative and Relationship among Companies job opportunities has been created.
Diversifying and investing in foreign markets aids businesses to reduce domestic exposure. Foreign direct investment reduces risk through diversification, checking it from the businesses point of view.
Through FDI, companies investing in foreign countries become more exposed but not reliant on Country it’s investing in, in terms of economic recession because it doesn’t rely on one market or one source of income.
4. Exchange of Culture, Technology, development and Knowledge.
When one firm from a country invests in another company in foreign land, it has a say in that company. The technology and knowledge the company has will be transferred to the company they invested in.
The company that invested will ensure the efficient running of the company it invested in, they can also determine to some extent on how the business will be run.
The workers from the investing company to the foreign company, by interaction, and cordial relationship existing among them and the foreign workers can learn and adapt to eachother’s culture.
The company that invested in the foreign company could learn the basics of the business, technological know-hows involved in the business and bring it down to their very own country thereby ensuring development.
5. Reduced Regional and Global Tensions
Through this Foreign Direct Investment division of labour can insure as works could be divided among each states and countries. A country might be handling a part in the segment of the work done by the company and the other country handling another part of means of production, thereby, all dependent on each other.
This division of labour will make all feel equal and no country will feel superior among others because, without eachother’s contribution to the means of production, the work won’t be completed and no complete product would be achieved.
This option would make all look out for eachother and their would be checkmates to see that everyone meets up with target. Dependence on eachother will exist also peaceful correlation dominates.
6. Availability of Employment and Economic growth
The citizens of the local company and foreign company will enjoy job opportunity because when more money is invested in the business more workers will be needed and productivity will be high.
When the rate of unemployment is reduced, level of purchasing power increases. When the purchasing power is high, employment in other markets and industries ensures.
Also when more money is invested in the means of production, their will be enough materials to produce more goods, thereby hindering inflation.
7. Tax Incentives
Government offers tax breaks to foreign investors in a bid to encourage FDI through tax incentives.
Low tax payment by the companies can help them save more money to be put in the means of production. Most of the big firms use well planned techniques to off-shore money in international subsidiaries.
Countries like Monaco, Switzerland, and Ireland, etc have lower tax regimes and it benefits them.
Demerits of Foreign Direct Investment
1. Risk of Political or Economic Change
Relating to developing countries, other developed country nurture some fears of investing in the foreign country because of political instability, tribal war and social vandalism that might be in existence in the undeveloped country.
Countries in this state of menace, will be list thought about of investing in, because of the feared unfavorable conditions to development or social insecurity currently going on in the country. No business grows where there is political instability and war.
China and Japan, East Africa and middle Africa can be an example of what is explained.
2. Foreign Control
Some countries place strict restrictions on FDI, there must be a joint partnership with a local business in the country before investors can be able to invest, this is done in order to hinder foreign control.
The developing countries are afraid that the foreign country might dominate and take over their land, this can make them refuse foreign investors from investing in their country.
3. Loss of Domestic Jobs
FDI can foster employment in foreign lands thereby rate of employment depreciating in the Investing country.
When the money that could be used in the local market is being used to develop another country inform of Building industries, the locals suffers unemployment while the foreign citizens enjoy employment at higher level.
This is what happened in the case of US and Mexico. They lost to Mexico in production of Cars at cheaper rate. The Mexicans enjoy their cars at lower price while the cost is high in US.