What is foreign direct investment?

Foreign direct investment (FDI) refers to a company from one country that makes an investment in another country. This investment can be a physical investment, such as building a factory, buying land, or mining. Purchasing a majority interest in an existing foreign company is also considered a foreign direct investment.

Joint ventures and reciprocal trade agreements are other types of FDI. A joint venture includes two or more companies that finance and manage the investment in the foreign country. In a reciprocal trade agreement, two companies that produce similar products agree to act as distributors for each other in their home countries. When a company licenses its products and they are produced in a foreign country by another company, this is also a form of FDI.

When a company does this type of FDI to expand its business in another country, it is called horizontal foreign direct investment . A Japanese automaker building a factory in the United States or buying a majority stake in an American automaker are examples of horizontal FDI. Companies can also do vertical IDE to increase sales and expand the business.

Vertical FDI occurs when a company assumes the role of supplier or distributor of its finished products. When a Japanese automaker builds an auto parts factory in the United States or buys a car dealership to sell its cars, the Japanese company has engaged in vertical FDI. Taking on the role of provider refers to vertical IDE backwards . Companies that become distributors of their products in another country are practicing direct foreign direct investment .

All types of foreign direct investment can benefit the company. FDI can increase goodwill in the foreign country by creating jobs. The cost of the finished product can also be reduced as the products do not need to be imported. This, in turn, can reduce pressure on local governments to provide locally produced products. The IDE can also help significantly increase production and reduce production costs.

A company that wants to make a foreign direct investment must consider several factors when making such an investment to access new markets. The company must take stock of its internal resources to ensure it has the manpower and financial strength to support the new venture. You should also analyze the sales potential of your product in the new market. This includes determining your competitiveness against companies that already produce similar products in the new target market.

Go up

This website uses third-party cookies