Foreign direct investment in the global economy
Introduction
Foreign direct investment (FDI) involves ownership and control of a company in a foreign country. In exchange for the ownership, the investing company usually transfers some of its financial, management, technical, trademark or other resources to the foreign country. The foreign company may be created as a new venture by the investor or it may be acquired from an existing owner. Although no particular type of resource needs to be transferred to carry out FDI, it is usually accompanied by some transfer of money and people.
The main concept behind FDI is control of the assets in another country. There is another kind of investment, foreign portfolio investment (FPI) in which a firm buys shares and other financial assets in a foreign country, but it has no controlling interest in those investments. FPI is not covered here: we will deal with it in Chapter 6.
In keeping with your textbook this chapter is in two parts. Part A deals with theories of FDI (Chapter 6 of your textbook) and Part B deals with the political and economic aspects of FDI (Chapter 7 of your textbook).
Topics
The following is the outline of the topics covered in this chapter.
- 4.1 Part A: Theories of foreign direct investment
- 4.2 Extent and significance of FDI
- 4.3 Horizontal FDI
- 4.4 Theories of horizontal FDI
- 4.5 Vertical FDI
- 4.6 Summary: Part A
- 4.7 Part B: Political and economic aspects of FDI
- 4.8 The politics of FDI
- 4.9 Benefits of FDI to the host country
- 4.10 Costs of FDI to the host country
- 4.11 Benefits of FDI to the home country
- 4.12 BOP benefits
- 4.13 Employment benefits
- 4.14 Encouraging and discouraging FDI
- 4.15 Multicultural agreement on investment (MAI)
- 4.16 Summary: Part B
Learning outcomes
The objectives for this chapter have been carefully constructed to reflect the most significant concepts and ideas we are going to cover and to provide a focus for your work during the chapter. After completing the work you should be able to:
- define FDI and show how it fits into an MNE's activities
- differentiate between horizontal and vertical FDI
- explain why firms undertake FDI
- explain theories of both horizontal and vertical FDI
- discuss how political ideology has influenced government attitude to FDI
- show how FDI has benefits and costs for both the host country and the home country.
