Foreign direct investment (FDI) is a form of international business that can be beneficial to both parties. FDI encourages foreign companies to invest in a country, which can increase local economic standards and create jobs. Governments are also interested in attracting FDI because it increases the technological knowledge of local businesses and improves the quality of life. However, there are times when the goals of the two sides are at odds. Many governments want to regulate FDI, while multinational companies want to use it to their benefit.
FDI can be vertical or horizontal. Vertical FDI involves a company expanding its business to a different level in its supply chain. It can also involve different types of activities outside of the host country, but all must be related to the company’s main business. For example, McDonald’s could open a franchise in Japan and invest in a large-scale farming operation in Canada.
Resource-based and internationally integrated investments are generally net trade-creating, while local market-oriented investments are more difficult to classify a priori. They may have both trade-creating and trade-replacing effects, although more research is needed to assess whether one is more beneficial than the other.
Foreign direct investment can be a good way to diversify your investment portfolio. This type of investment involves purchasing stocks or bonds in foreign companies. However, foreign direct investment is more expensive, and requires a substantial investment in a foreign company. This investment is typically for the purpose of increasing the size of the company and growing its market. In general, this form of investment is welcomed in developing countries, as it promotes economic development.
