Foreign Direct Investment refers to the purchase of a company’s assets within the boundaries of another country by a different firm. For example, a company in the United States of America can increase its business enterprises by acquiring an industry of interest or by extensive marketing within the territories of China.
Foreign Direct Investment exists in different forms, which include acquisitions, mergers and setting up industries in the host country (Hill, 2012, p. 241). Countries or business entities that practice FDI must possess at least 10% shares of the company in question. FDI can be grouped into two categories; horizontal and vertical. Horizontal and vertical FDI involves full and partial control of the target company’s functionalities respectively.
Many countries have different opinions on political ideologies regarding FDI. Theses ideologies include radical, free market and pragmatic nationalism theories. Countries that value radical ideas conceptualize FDI as an activity that exploits a host country by limiting its economic development (Hill, 2012, p. 246). This can be proved by profit repatriation strategies from multinational companies investing directly in another country.
The free market theory promotes comparative advantage as a means of reducing costs and making products affordable to consumers. FDI has advantages and disadvantages, which make pragmatic nationalism effective and feasible for most countries. It gives countries advantages on economic development by providing policies that reduce national cost and promote economic benefits.
Vital costs related to foreign direct investment on host nations include perceived loss of sovereignty and remainder of payment deficits. States should implement policies that make FDI beneficial to all participating countries. For example, host nations should encourage inward FDI and limit outward FDI. In the end, countries that participate in this form of investment will definitely be successful.
Foreign Direct Investment can develop or destroy a country’s economic status. The most affected are host countries with limited resources. Allowing one country to take over large businesses within another state makes the target country vulnerable to making choices. This may result independence of the host country on skills and technology from its foreign inventors. As described earlier, most countries prefer pragmatic nationalism when dealing with FDI (Hill, 2012, p. 255).
This means all countries benefit from the investment. Implementing policies that restrict dominance of one country over another promotes political, social and economic benefits. For example, China manages to limit capital outflow and profit repatriation from its foreign investors. Foreign-owned companies within China must accept to employ native inhabitants before closing any deals with the government.
This reduces the chances of profit repatriation to the native country of alien investors. On the other hand, this policy allows investors to practice comparative advantage within its target territory. In most cases, investors utilize cheap resources to reduce costs. Labor costs may affect the manufacturing strategies of a company, which discourage its consumers from buying a product. Governments should consider all economic indicators of FDI before making conclusions.
When dealing with FDI, it is important to note that the political ideologies of any country determine the economic and social status of investors. Ineffective policies may sabotage a country and make it dependent on other states. Developing countries should endeavor to invest in research and development as a way of identifying vital policies. This will limit the negative impacts of FDI within developing states.
Hill, C. W. (2012). International business. New York, NY: McGraw-Hill Education