Foreign Direct Investment Flashcards, test questions and answers

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What is Foreign Direct Investment?

Foreign direct investment (FDI) refers to an international investment in which a company from one country owns or controls the production of goods and services in another country. FDI is distinct from portfolio investments, which involve buying stocks and bonds in foreign companies without controlling their operations. FDI can take many forms such as establishing a subsidiary or associate company, building a factory, investing in research and development, taking part in privatization processes, purchasing existing companies or assets, making a strategic alliance with another company, or entering into franchising agreements.The decision to invest abroad is often motivated by the need to diversify risk exposure and gain access to new technologies, products and markets. A company looking to expand its operations may find that it has limited opportunities at home due to market saturation or lack of resources; investing abroad can offer the possibility of growth beyond current boundaries. In addition, FDI may help promote economic development in host countries by creating jobs for local workers, transferring technology and know-how through training programs for employees, helping build infrastructure related to transportation and communications networks and increasing competition within industries. FDI can also be beneficial for investors as it offers more control over operations compared to portfolio investments; this allows investors more influence over management decisions such as production methods used or pricing strategies employed by foreign companies they own. Furthermore, profits earned from foreign subsidiaries are not subject to double taxation as long as certain conditions governing ownership structure are met. On the other hand there are risks associated with FDI that should be considered carefully before investing abroad including potential political instability in host countries that could lead to expropriation of assets or disruption of business activities; unfavorable currency exchange rate changes which could reduce profits made from foreign operations; increased competition due solely because domestic firms lack protection against cheaper imports produced abroad; changes in laws governing intellectual property rights leading to unauthorized copying of products developed domestically; difficulties encountered when attempting repatriation of profits due high taxes imposed on funds sent back home; cultural differences between countries making it difficult for companies operating across different times zones; labor laws that limit flexibility for hiring/firing personnel at foreign locations etc.). In conclusion we can say that Foreign Direct Investment has become an important tool for global expansion but must be approached with caution given all associated risks involved in venturing into unknown territories outside one’s home country borders.