If you deal with the topic of globalization, you will come across the term foreign direct investment again and again. In this article you will find out what this is and what role they play. The topic belongs to the subject Geography and is part of the topic area of globalization and belongs to the subtopic financial centers.
What is Foreign Direct Investment?
Foreign direct investment (FDI) refers to investments made by a company or by state governments. The goal is permanent participation in a company abroad.
Foreign direct investment is often referred to simply as foreign investment. They are the main instrument of cross-border entrepreneurship. This includes investments to set up branches or to acquire and invest in companies abroad.
In 2003 there were foreign direct investments in the EU of US$ 3,335 billion, in the USA of US$ 1,554 billion, in Canada of US$ 275 billion, in South America & Caribbean US$ 647 billion, in China US$501 billion, Hong Kong US$375 billion and Singapore US$147 billion.
Historical development of foreign direct investments
The rapid development of foreign direct investments began in the 1980s. Direct investments have risen faster than export figures or other financial transactions. The increase in foreign direct investments can be seen as an indicator of globalization. The dominance of the OECD countries and thus an economic power imbalance on a global level can be clearly seen here.
The Organization for Economic Co-operation and Development (OECD) is an international organization whose goal is better policies for better lives. In this way, prosperity, justice, opportunities and quality of life are to be secured for all. The OECD currently has 38 member states.
Aims and motives of foreign direct investments
The aim of foreign direct investments is primarily to influence the strategies and activities of the newly founded or acquired companies abroad.
They have different motives. These include:
- Development/securing of sales markets
- Tax benefits
- bypassing trade barriers
- Securing raw material and energy sources
- Use of favorable site conditions
In the case of foreign direct investments, the focus is on the choice of location. However, risks can arise that lead to restrictions or the absence of foreign direct investment.
Examples are:
- Political risks (e.g. actions of the foreign government)
- Economic risks (e.g. exchange rate risk, sales risk, labor market problems, storage risk, payment risk)
- Social risks (e.g. language difficulties)
- Other risks (e.g. climatic conditions)
Distribution of Foreign Direct Investments
If you look at how foreign direct investments are distributed across the economic sectors, you can see that the focus is on the tertiary sector. In the tertiary sector, the focus is primarily on financial services and trading companies.
Looking at the secondary sector, the focus is almost exclusively on knowledge-intensive industries. These sectors include the electronics, pharmaceutical, chemical and data processing industries.
Foreign large-scale agricultural investment
Foreign direct investments are increasingly also agricultural investments. Well-funded investors, including China and Saudi Arabia, for example, are securing large areas, especially in Africa. The goal is to produce food and bioenergy there with the help of industrial agriculture in order to compensate for national deficits or to make profits.
Criticism of foreign direct investments
Foreign direct investment is extremely controversial. The effects in developing countries are particularly criticized. For developing countries, foreign direct investments can bring great growth opportunities, since enormous knowledge and know-how can transfer to the host country. However, this always depends on how much the inhabitants of the affected country are involved. This effect is called the spill-over effect.
Spill-over effects are broadcast effects. These are effects that go beyond the actual target area of a decision. Many activities in the company also bring effects that are not wanted by the decision-maker in terms of content, space or time, or are not relevant to the decision-making field. They can have both positive and negative side effects on the company.
Foreign direct investments are also criticized because they bring disadvantages. These include:
- The negative impact on decision-makers in developing countries
- The negative development effects, as companies act profit-oriented
- The exploitation of labor without increasing wealth
Benefits of Foreign Direct Investment
Foreign direct investment also brings benefits to companies and investors. These include, for example:
- Relocation of production: the direct costs of production are reduced and economies of scale are achieved
- Tax avoidance: the tax difference between different countries is used as a cost advantage
- Financial markets: easier access to financial markets through improved liquidity or leverage
- Global coordination: certain activities are carried out centrally where the framework conditions for this activity are optimal
- Reduction of political risk: High investments are safer in regions of relative political stability than in regions with high levels of instability.
Insider tip! Has the topic of globalization grabbed you and you want to learn more? Then have a look at our articles about the causes of globalization, the global players, the winners and losers of globalization, global tourism or the financial centers.
Foreign direct investments – the most important facts at a glance
Foreign direct investments – the most important things at a glance:
- Foreign direct investment (FDI) refers to capital investments
- The aim of foreign direct investment is permanent participation in a company abroad
- Beginning in the 1980s
- Political, economic and social risks should be taken into account
- ADI focuses on the tertiary sector