FOREIGNDIRECTINVESTMENT(

FDI)
Foreign direct investment

 Foreign direct investment occurs when an

entity invests directly in production or other
physical facilities in a foreign country.

 For instance, Lehel Company in Hungary was

acquired by the Electrolux Company in 1991
as a type of foreign direct investment.
 
There are two terms that you should know with regard to
FDI:

 Outward FDI isoutflow of FDI out of a home

country where firms undertake FDI in foreign
countries.

 InwardFDI is inflow of FDI into a host country

by firms.
FOREIGNDIRECTINVESTMENT(FDI) PATTERN

2008(USD in billion) 2007(USD in billion)

Rank Country

Inflow Outflow Inflow Outflow

1 United States 316.11(18.6%) 311.79(16.8%) 271.18(13.7%) 378.36(17.6%)

2 France 117.51(6.9%) 220.05(11.8%) 157.97(7.9%0 224.65(10.4%)

3 China 108.31(6.4%) 52.15(2.8%) 83.52(4.2%) 22.47(1%)

4 UK 96.94(5.7%) 111.41 (6%) 183.39(9.3%) 275.48(12.8%)

5 Russian Federation 70.32(4.1%) 52.39(2.8%) 55.07(2.8%) 45.92(2.1%)

6 Spain 65.54(3.9%) 77.32(4.2%) 28.18(1.4%) 96.06(4.5%)

7 Hong Kong 63(3.7%) 59.92(3.2% 54.37(2.7%) 61.12(2.8%)

8 Belgium 59.68(3.5%) 68.79(3.7%) 110.77(5.6%) 93.90(4.4%)

9 Australia 46.77(2.8%) 35.93(1.9%) 44.33(2.2%) 16.81(0.78%)

10 Brazil 45.06(2.7%) 20.46(1.1%) 34.59(1.7%) 7.07(0.33%)

 A recent survey of transnational corporations
found that companies see China
andIndiaastheworldÊsfirstandsecondmostim
portantdestinationsforforeign direct
investment over the 2010 to 2012 period,
respectively
MAJOR MOTIVES OF
FOREIGN DIRECT
INVESTMENT (FDI)
Four major motives of foreign direct
investment.
1.RESOURCE SEEKING

 Firms aim to gain control of the natural

resources of a host country such as minerals and
oil supply.
 In other words, resource seeking FDI whether in
terms of human labour or other natural factors
of production such as land have equal
implications and meaning to the firm in
question. The bigger picture is to obtain relatively
cheap resources that can lower production costs
while maximizing returns.
2. MARKET SEEKING

 for companies which have internal

advantages, such as technology expertise
and popular brands. These advantages
provide the competitive edge when entering
foreign markets.
 as market size, market growth, structure of
domestic market, etc. aim at penetrating the
local markets of host countries.
3. COST SEEKING OR EFFECIENCY
SEEKING
 Firms seek FDI to take advantage of the low
production cost in the host country. Most of the
companies from developed countries aim to take
advantage of the
differentfactorendowments,laboursupply,governmen
tpoliciesandeconomicsystemsto become efficient in
their production. The main determinant of inward FDI
into China and India is mainly due to their cheap
labour cost and other location advantages that enable
FDI to keep production costs low and competitive.
4. ADVANCEMENT INTECHNOLOGY

which has forced companies to

develop and sell their products
faster
IMPACTOFFOREIGNDIRECT
INVESTMENT (FDI)
 Foreign direct investment is a complex, costly
and lengthy method and has high
riskscomparedtootherentrymethodssuch
asexportingor licensing.Thereason is because
a company would have to build its own
facilities or buy other existing companies.
This is high risk investment as many
problems can occur in countries with different
cultural and economic backgrounds.
The main benefits of FDI to host countries are:

 FDIbringsaboutcreationofnewjobsandempl
oymentinthehostcountry.
 The host country benefits from transfer of
technology.
 FDI affects the economic development of
the host country.
The possible negative impacts are:

 FDI exposes host countries and leads them

and their resources to exploitationby the
foreign company
 There is a risk of FDI firms leaving the host
country when other emerging countries
become more attractive with location
advantages.