Foreign direct investments are a significant aspect of integrating a country’s economy into the global markets. They can promote economic growth and development through financial assistance to the host country. Besides, FDI can expand business know-how, new technology attraction, and accessibility of international markets. So what are foreign direct investments?
Foreign direct investments or FDI is a venture made by either an individual or a business entity to a foreign organization. It can also mean the acquisition of assets with the aim of controlling production and business distribution activities in another country.
Types of FDI
There are various forms and levels of FDI, depending on the reasons for investments and types of firms involved. They include:
This is when a firm expands its operations to a different country. That means the investments made are for conducting similar firm operations in a foreign country. An example would be McDonald’s opening restaurants in China. It can also be when a company merges with another one in a foreign country to produce homogeneous products or services.
Vertical FDI is when a business grows into a foreign country so as to add value to your production value-chain. The company will be conducting different activities in the foreign country. However, these activities will still be related to the primary firm’s operation. For instance, if McDonald’s purchased a large-scale farm in China to produce meat for restaurants.
In this type of FDI, a firm acquires an unrelated business in a different country. This is typically uncommon as it will entail overcoming at least two barriers: venturing into a foreign country as well as a new entrance into new industry or market. For instance, a motor assembly plant based in the UK invests in a clothing line in France.
Also referred to as the export-platform FDI, platform investments are when a firm expands into a different country, but the output from that operation is exported to another (third) country. It occurs mainly in low-cost places within free-trade areas. An example is if Ford acquires a manufacturing plant in Ireland, intending to export cars to other EU nations.
Other forms of FDI
Resource seeking FDI- these are investments made to gain factors of production that are more efficient than those available in the firm’s home economy. For instance, a company that seeks cheap labor in Southeast Asia or natural resources in Africa or the middle east.
Strategic asset seeking FDI- this is a tactical venture to hinder a competitor from gaining a particular resource. For example, an oil-refining firm might not need that oil at present, but invests in it to deter their competitors from having it.
Acquisition seeking FDI- this entails the purchase of shares in a company, its associates, or subsidiary. It can also occur when the assets or operations management is transferred to a foreign firm with the local enterprise remaining as an affiliate program.
On a final note
FDI can bring in new technologies for a country as well as a way for investors to enjoy economies of scale. Even so, it is wise to seek help from an expert financial platform to assess host country economic climate and enjoy FDI lucratively. The Online Publishers “TOP platform” is a sophisticated digital marketing tool with vast experience in business journalism that will shed light on the target country’s prevalent economic landscape. We are also accustomed to working internationally, and hence, we will help in monitoring market stability and predicting future growth.