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Foreign Direct Investment (FDI), Essay Example

Pages: 2

Words: 582

Essay

Introduction

For businesses that choose to compete globally, foreign direct investment is an effective corporate strategy. Although businesses can achieve some foreign recognition by indirect financial acquisition, trading, or technology development, they can best allocate capital, including home and internationally, by investing explicitly in local production and trading facilities. Hosting countries, which may place numerous barriers to trade on imports, also attract foreign direct investment. For developed and emerging market countries, foreign direct investment is important. To extend their foreign markets, their businesses need global capital and skills. To raise employment and incomes, their countries require private infrastructure investment, electricity, and water. The United Nations has often advocated for the usage of FDI to mitigate the effects of climate change (Sonal,156). In this paper, we will focus on the reasons why companies engage in foreign direct investment.

Trade barriers can be avoided.

National protectionism will also emerge from time to time, even though free trade is becoming more common. Countries erect trade barriers because they do not believe that importing will help their economies develop rising production capability or enhance technological use. Furthermore, purchasing foreign exports could increase and more convenient consumption and depleting foreign exchange reserves. As a result, businesses expanding into international markets can find that focusing solely on trade is inefficient. Foreign direct investment is an option to manufacturing products in the country where they would be distributed.

Reduce the cost of production

Companies are increasingly turning to foreign direct investment to cut manufacturing costs. Corporations can import moderate raw materials, but they can’t take advantage of inexpensive labor in another world if they manufacture in their own country. In the meantime, investing directly in foreign manufacturing plants whereby raw materials are provided saves logistics as the materials are no longer required to be imported. Even if they intend to ship back finished goods to sell in their home countries, businesses may save money in certain situations.

Increase the number of market channels

Making locally by foreign direct investment lets businesses keep a finger on the pulse of domestic industry dynamics, despite trade restrictions and manufacturing costs issues. Many businesses choose to reach into new territories outside of the United States as the domestic sector becomes increasingly crowded (Sonal,158). However, manufacturing away from consumers decreases reaction impact in order to respond to changing demands. To have the best goods for the emerging business platforms, foreign direct investment puts together manufacturing staff and marketing crews.

Obtain local assistance

Hosting countries also provide a variety of benefits to encourage foreign direct investment, ranging from reduced rates to simpler implementation processes to government-backed funding and better access to local capital. Companies that either has local distribution offices or have formed a strategic relationship with local companies are not considered foreign direct investors. Many of the city councils’ giveaways will not be available to businesses until they invest their money locally in houses, machinery, and appliances. Companies who invest physically in the establishment of factories and other service facilities may find that the host community readily accepts them.

Conclusion

When an investment in a foreign company creates a long-term stake, it is called an FDI. Whenever an investor relinquishes at least ten percent of a company’s voting power, a permanent interest is created. The factor of control is crucial to foreign investment. Control denotes the need to consciously manage and manipulate the affairs of a foreign company. The main distinction between FDI and a conservative foreign portfolio fund.

Work cited

Pandya, Sonal S. “Labor Markets and the Demand for Foreign Direct Investment.” International Organization, vol. 64, no. 3, 2010, pp. 389-409.

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