What is Foreign Direct Investment Term Paper Example | Topics and Well Written Essays - 2500 words

What is Foreign Direct Investment - Term Paper Example FDI or Foreign Direct Investment is defined as the scenario where "A company from one country obtains a controlling interest in a (new or existing) firm in another country, and then operates that firm as a part of the multinational business of the investing firm. FDI may be financed through parent company transfer of funds to the new affiliate, borrowing from home-country lenders, borrowing in the host country by the parent company, or any combination of these strategies." (FDI Definition, n.d.)  Foreign direct investment is also a measure of ownership of private enterprise, its stocks, and resources, and used as a growing tool in economic globalization. These investments add up to the GDP (gross domestic product) of industrialized and industrializing economies.  There are quite a few different modes of entry to foreign markets, but almost all of them can be categorized under the following four- exporting, licensing, franchising and direct investment. Each of these entry modes ha s their own set of advantages and disadvantages, and the appropriateness of each of them depends on the market dynamics of the guest country as well as the factors specifics to each company.  Foreign Direct Investment allows the investing firm to varied a degree of control over its overseas business activities. FDI, additionally, offers higher profitability options to the investing company. Control is one of the most important characteristics of FDI, and hence FDI is generally adopted as a preferred mode of entry when control and coordination are critical to the success of international drive of the company. Foreign direct investment is also preferred when the host market prefers buying products that are locally manufactured. Many governments also actively promote FDI as FDI directly adds value to the local economy and generates employment. Additionally, many retail, as well as institutional customers, feel that local manufacturing presence results in better after sales service an d decreases the overall cost of ownership.  However, FDI has its own set of disadvantages too. FDI, by definition, involves a higher commitment level for the company, and the company is exposed to a range of risks including political, geographical and economic risks. FDI is also subject to probable depreciation of the value of its investment in case of an adverse fluctuation of exchange rates. Despite the fact that FDI is generally encouraged by the government, there are cases where government policies act as a roadblock for FDIs. In many countries, government policies forbid foreign countries from owning majority control of a local company in selective or all industries. In some other countries, there are various levels of restrictions in the repatriation of profits. Companies opting for foreign direct investment as the entry mode to other economies or markets also have to face additional challenges in terms of allocating additional bandwidth, adapting to local political, legal a nd business environments. (Marchick D.M. and Slaughter M.J., June 2008)