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Foreign Direct Investment | FDI

Every businessman has the motive to earn as much profit from his business. In this regard, a lot of 
research is carried out to find all possible solutions to maximize a company’s profits. There are numerous factors that affect the sales revenue like insufficient or expensive natural resources, unskilled and low productive human capital, natural calamities, an unstable political environment, rigid policies of governments. Foreign Direct Investment FDI is also done to avoid those conditions which affect the profits of a business.

FDI occurs when a firm invests directly in facilities to produce or a market product in a foreign country. Once a firm undertakes foreign direct investment (FDI), it becomes a Multi-National Enterprise (MNE).

What is FDI?

Direct investment into production or business in a country by an individual or company of another country, either by buying a company or by expanding operations of an existing business in that country.

The amount of FDI undertaken over a given period of time (normally a year) is known as the flow of FDI.

The flow of FDI into a country is called Inflows of FDI

The flow of FDI out of a country is called The outflow of FDI.


In which ways FDI occurs?

FDI takes on two main forms;


Green-field Investment:

When a foreign investor establishes a new business in a foreign country then this form of investment is known as green-field investment. It may be a trading business in which purchasing goods at lower prices and then selling at higher prices is made. Or it may be a manufacturing business where new products are manufactured using the resources of the host country.

Starbucks, Coca-Cola and McDonald’s are fine examples of Green-field investment. They have invested all over the world to expand their operations and to achieve economies of large scales.


Acquisition or Merger:

When a foreign investor buys an existing firm or a business setup then he becomes the owner of that firm and the process is called acquisition. The acquisition is simply the possession of an existing business by purchasing shares in the stock exchange.

Facebook acquired WhatsApp in 2014.

On the other hand, a Merger is the combining of two or more business units into a single unit. Consequently, large economies of scale can be achieved and the scope of marketing, research, management, operations will also expand.

 Walt Disney Co. merged with Pixar in 2007 for $7.4 billion.

The merger of Android with Google in 2007 for $50 billion.


Acquisitions can be divided into three forms:

A Minority Stake: In which the foreign firm takes a 10 percent to 49 interest in the firm’s voting stock.
A Majority Stake: A foreign interest of SO percent to 99 percent.
A Full Outright Stake: Foreign interest of 100 percent.


What are the Host country and Home country?

The country from which a foreign investor belongs is called Home Country. Foreign investors invest in the host country, earns a profit, and sends back their profits to their home country in the form of Foreign Remittances.

The country which attracts and receives foreign direct investment is known as Host Country. It facilitates the foreign investors by allowing the usage of natural resources, human capital, providing infrastructure and communication. The host country gets its citizens employed, utilized natural resources, and fosters economic activities which lead to economic development.



Major determinants which attract the multinationals enterprises (MNEs) or companies (MNCs) are as follow;

v  Intensity of Natural Resource

v  Market Size of Country

v  Labor Costs and Productivity

v  Level of Skills and Expertise

v  Tax Rates

v  Political Environment

v  Legal institutions

v  Economic Determinants

v  Social Issues



The Free Market:

Nations specialize in goods and services that they can produce most efficiently.

Positive changes in-laws and growth of bilateral agreements to the strength of the free market.

All countries reduce restrictions on FDI.

Exchange Rate:

The exchange rate variable has been widely debated in the literature on FDI determinants.

An economy (being served through exports from the home country) with a depreciating currency attracts more FDI as exporting from abroad to it becomes expensive, while it was cheaper to produce locally.

Social Issues:

All had signs of society discourage the FDI.

Economic Determinant:

IME programs are nice but not critical

Foreign exchange availability

Fiscal Policy particularly transparent tax policy


Regulatory environment


Imports & Exports Trend:

Countries imports from abroad will attract FDI.

Imports the host economy serve as an indicator of the existing market for the exports of the home country firms.


Interest Rates:

The interest rate variable is the important determinant of FDI.

MNEs can raise funds both at home and abroad to finance their activities, depending upon the rates of interest.

Local borrowings in the host country might increase when interest rates are lower as compared to the home country.



The role of growth in attracting FDI has also been the subject of controversy.

A growing economy provides relatively better opportunities for ‘making profits than the ones grossing o’ not growing at all.



Infrastructure covers many dimensions;


Sea Ports,


Telecommunication System

Institutional development (accounting, legal services, etc.)


Human Capital:

A higher level of human capital is a good indicator of the availability of skilled workers which can significantly boost locational advantage of a country.

Highly but low wages rate also attractive on EDI.



Resource Intensity:

Countries with natural resources would receive more FDI.

Share of minerals and oil in total exports to capture the availability of natural resources endowments.

Raw material to some production and manufacturing companies is easily available.


Country Market Size:

It is the main determinant for horizontal

It is irrelevant for vertical FDI

The size of the host market or country which also represents the host country’s economic conditions.


Labor Cost and Productivity:

Labor cost and productivity is the most contentious of all the potential determinants of


Labor cost (wages) has always been argued to be a major component of total production cost.

If the country has a comparative low wages rate from others it attracts more FDI.

Wages rate normally low in developing countries.


Tax Rates:

Higher tax rate of the host country would be a negative effect on FDI.

However, their low tax rate attracts the FDI.


Level of skills and Expertise / Human Capital:

A higher level of human capital is a good indicator of the availability of skilled workers. Which can significantly boost the locational advantage of a country.

Highly skilled but low wages rate also attractive on FDI.

Political Instability / Factors:

The ranking of political risk among FDI determinants remain rather unclear.

Political instability creates an unfavorable business climate.

Political risk rating as provided by the International Country Risk.


Legal Institutions:

The traditional view is legal institutions play a central role in attracting FDI.

Protecting private rights. Especially the property and contract rights of foreign investors.

By creating the legal foundations for market-oriented reform.

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