Question

What is Foreign Direct Investment? Why do firms choose Foreign Direct Investment instead of exporting or licensing? What benefit do Foreign Direct Investment have for the host country?

Answer 1

What is Foreign Direct Investment?

Foreign direct investment (FDI) is an investment made by a firm or individual in one country into businesses located in another country. FDI usually takes place when an investor establishes foreign business operations or acquires foreign business assets in a foreign company.

Why do firms choose Foreign Direct Investment instead of exporting or licensing?

Firms will prefer FDI over exporting in order to break into foreign markets when transportation costs or trade barriers make exporting unattractive.

Firms will also favour FDI over licensing when it wants to maintain control over its technological know how, or over its operations and business strategy, or when firm’s capabilities are simply not amenable to licensing, as may often be the case.

What benefit do Foreign Direct Investment have for the host country?

The following are the benefits of FDI for the host country:

• Economic stimulation
• Development of human capital
• Increase in employment
• Access to management expertise, skills, and technology