September 26, 2022

World Trades

Finance Blog

A Complete Guide to Foreign Direct Investment

3 min read

In Foreign direct investment or FDI, the company or individuals owns 10% or more of a foreign company. In case, the investor acquires less than 10%, it is defined as a part of his stock portfolio by international monetary fund.  It allows him an influence over the management, policies and operations. However, he does not give him the controlling interest. This is the reason why the government closely tracks who is investing into the country’s business.

What is the importance of FDI?

It is interesting to know why FDI holds so much importance. FDI is important for the emerging and developing countries. This is because, the companies require multinational companies to fund them and expand their sales globally. Apart from that, the companies also need investments in terms of infrastructure, water, energy so that they can increase the wages and jobs for people locally and internationally which in turn contributes to the country’s economy.

Not only the developing countries but also the developed countries need FDI. They need it for different reasons. Most of them invest in the form of mergers and acquisitions with the mature countries. They do so to either restructure or refocus their core businesses for betterment.

Advantages of FDI

With FDI, the investment and revenues increase which affects the economy of any country to a great extent. It gives monetary benefits to both the investors and the businesses. The profits are shared and companies across the globe work together to achieve the overall success irrespective of the color, cast and creed. This way, the political stress can be relieved and the world’s economy gets affected greatly.  The businesses are carried out in the global market and get the best results.

The businesses also work globally in terms of legal implications, investments, management and employment. It helps them grow internally as well because they are able to get familiar with the operations being carried out in different countries and companies. The individual investors also get benefits at the lower risks. The companies also hire the best and most qualified workforce which work for the betterment of the company.

Disadvantages of FDI

As every coin has two sides, FDI also comes with some disadvantages. The countries must not give the foreign ownership of companies in important industries. The foreign investors may sell their portion to the local and less reputed investors. These investors may also use the company’s collateral to take loans from their local lenders.

A few reasons why FDI is encouraged

FDI has become popular across the world. Some of the reasons why it has happened are mentioned below:

  • The cost of hiring people in some countries is lower than other countries. For an instance, in India, the labor cost is less as compared to other countries.
  • It reduces the transportation costs.
  • It gives the companies enough exposure about how they can do better in the local market.

We can conclude that FDI has made a great difference in the economy of every country.