Foreign Direct Investment (FDI) is the purchase of assets like land and equipment in another host nation while running the facility from the home country. In the event of FDI, the foreign investment business must have at least 10% of the voting rights. The primary distinction between FDI and other foreign ventures is that the new business works totally outside of the firm’s home nation’s economy. When a nation chooses to undertake FDI in another economy’s territory, it will most likely be able to benefit from the host country’s various assets and advantages, as well as profit.
One of the reasons why a home country will focus on promoting FDI in a host country is that it introduces foreign cash into a country’s economy, increasing labor demand and boosting wages. It aids in developing the economy, which is necessary for local governments to increase income and increase citizen-directed activities. The demand for a local currency may increase its buying power, ensuring that citizens’ wealth does not often decline as time passes.
Increased earnings due to the host nation’s geographical advantages are another reason why a home country might promote FDI in a host country. In this context, geographic benefits include colossal market size, closeness to the home market, low-cost labor, and favorable tax treatment in the host country. Due to tariffs and other impediments, the company is forced to shift manufacturing to the host nation, which it previously serviced by exporting (Bhasin & Kapoor, 2020). They may also better serve a local market by producing locally and delivering items to customers all over the globe.
A home country’s economic and political strength will improve as a result of FDI promotion. FDI helps not just recipient nations but also home countries, whose economic gains are dependent on the efficiency of enterprises over which they have control. Furthermore, enterprises in the host nation must rely on the home country in order for the home country to have political clout over the host country.
Reference
Bhasin, N. & Kapoor, K. (2020). Impact of outward FDI on home country exports. International Journal of Emerging Markets, 16(6), 1150-1175. Web.