A foreign direct investment (FDI) refers to purchase of an asset in another country, such that it gives direct control to the purchaser over the asset (e.g. purchase of land and building). In other words, it is an investment in the form of a controlling ownership in a business, in real estate or in productive assets such as factories in one country by an entity based in another country.
Foreign direct investment is distinguished from foreign portfolio investment, a passive investment in the securities of another country such as public stocks and bonds, by the element of “control.
According to the Financial Times, “Standard definitions of control use the internationally agreed 10 percent threshold of voting shares, but this is a grey area as often a smaller block of shares will give control in widely held companies. Moreover, control of technology, management, even crucial inputs can confer de facto control.
Advantages of FDI
*Economic growthT
he creation of jobs is the most obvious advantage of FDI, one of the most important reasons why a nation (especially a developing one) will look to attract foreign direct investment. FDI boosts the manufacturing and services sector which results in the creation of jobs and helps to reduce unemployment rates in the country. Increased employment translates to higher incomes and equips the population with more buying powers, boosting the overall economy of a country.
*Human capital development
Human capital involved the knowledge and competence of a workforce. Skills that employees gain through training and experience can boost the education and human capital of a specific country. Through a ripple effect, it can train human resources in other sectors and companies
*Technology
Targeted countries and businesses receive access to the latest financing tools, technologies, and operational practices from all across the world. The introduction of newer and enhanced technologies results in company’s distribution into the local economy, resulting in enhanced efficiency and effectiveness of the industry
*Increase in exports
Many goods produced by FDI have global markets, not solely domestic consumption. The creation of 100% export oriented units help to assist FDI investors in boosting exports from other countries.
*Exchange rate stability
The flow of FDI into a country translates into a continuous flow of foreign exchange, helping a country’s Central Bank maintain a prosperous reserve of foreign exchange which results in stable exchange rates.
*Improved Capital Flow
Inflow of capital is particularly beneficial for countries with limited domestic resources, as well as for nations with restricted opportunities to raise funds in global capital markets.
*Creation of a Competitive Market
By facilitating the entry of foreign organizations into the domestic marketplace, FDI helps create a competitive environment, as well as break domestic monopolies. A healthy competitive environment pushes firms to continuously enhance their processes and product offerings, thereby fostering innovation. Consumers also gain access to a wider range of competitively priced products.
*Climate
The United Nations has also promoted the use of FDI around the globe to help combat climate change.
Disadvantages of FDI
*Hindrance of domestic investment
Sometimes FDI can hinder domestic investment. Because of FDI, countries’ local companies start losing interest to invest in their domestic products.
*The risk from political changes
Other countries’ political movements can be changed constantly which could hamper the investors.
*Negative exchange rates
Foreign direct investments can sometimes affect exchange rates to the advantage of one country and the detriment of another.
*The risk from political changes
Other countries’ political movements can be changed constantly which could hamper the investors.
*Negative exchange rates
Foreign direct investments can sometimes affect exchange rates to the advantage of one country and the detriment of another.
*Higher costs
When investors invest in foreign counties, they might notice that it is more expensive than when goods are exported. Often times, more money is invested into machinery and intellectual property than in wages for local employees
*Economic non-viability
Considering that foreign direct investments may be capital-intensive from the point of view of the investor, it can sometimes be very risky or economically non-viable.
*Expropriation
Constant political changes can lead to expropriation. In this case, those countries’ governments will have control over investors’ property and assets.
*Modern-day economic colonialism
Many third-world countries, or at least those with history of colonialism, worry that foreign direct investment would result in some kind of modern-day economic colonialism, which exposes host countries and leave them vulnerable to foreign companies’ exploitation.
*Poor performance
Multinationals have been criticized for poor working conditions in foreign factories.
IMF: Global foreign direct investment
Global foreign direct investment grew again in 2023 after declining the previous year. Inward direct investment climbed $1.75 trillion, or 4.4 percent, reaching a record $41 trillion, according to the IMF’s latest Coordinated Direct Investment Survey, which provides detailed information on direct investment positions between countries.
FDI rose in most regions, with Central and South Asia, Europe, and North and Central America contributing most. Direct investment between advanced economies grew by $880 billion, or 3.6 percent, while those from advanced economies to emerging market and developing economies rose by $538 billion, or 7.6 percent.
As our Chart of the Week shows, the United States extended its lead as the top destination for direct investment. Singapore recorded the largest gain in 2023, with its position rising $307 billion, followed by $227 billion for the United States and $164 billion for Germany. Meanwhile, the Netherlands and Luxembourg posted the steepest declines but remained in the top five, alongside the United States, China, and the United Kingdom.
Strong growth was also seen in many emerging economies. Most notably, India, Mexico, and Brazil each saw their inward direct investment positions rise by around $130 billion or about 20 percent, marking the largest increase for these three economies in total since the survey began in 2009.
2023 Foreign Direct Investment (FDI) to GDP
Brazil 3%, China 0,2%, Germany 0,4%, India 0,6%, Indonesia 1,6%, Korea Selatan 0,9%, Malaysia 2%, Netherlands – 26,8%, Philippines 2,1%, Singapore 34,9%, USA 1,3%, UK – 2,6%, Vietnam 4,3%, Thailand 1,3%.
ASEAN Foreign Direct Investment
In an era marked by shifting global economic dynamics, including the redirection of investment flows and the diversification of supply chains to mitigate geopolitical risks, ASEAN has consistently proven its resilience and appeal as a leading destination for Foreign Direct Investment (FDI). For three consecutive years, ASEAN has maintained its position at the top of FDI recipients among developing regions.
In 2023, FDI inflows to ASEAN reached another historical level of US$230 billion, despite an overall decline in global FDI flows.The shifting patterns and priorities in global FDI, particularly the growing focus on digital and green technologies, are also strongly manifest in the region. Major international investment trends in 2023 underscored ASEAN’s rising prominence as as a global hub for financial and digital services as well as manufacturing.
This is evident from the increasing investor interest in these sectors as well as robust investments in renewable energy (RE), electric vehicle (EV), and digital economy in recent years. Over the past decade, the FDI from Multi-National Enterprises (MNEs) in the manufacturing sector has significantly advanced the region’s economic integration, technology upgrading, and sustainability agenda.
Investment in manufacturing, wholesale and retail trade, and transportation and storage declined. However, manufacturing remained important with more than $50 billion of FDI inflows, or 22 per cent of the total. Moreover, the number of new greenfield investment project announcements in manufacturing more than doubled in 2023.
Investment from the top 10 sources constituted 80 per cent of total FDI in 2023, up from 75 per cent in 2022, underscoring the critical role of these investor home countries. The United States and China were particularly prominent, with flows from the United States more than doubling to $74 billion, representing a third of all FDI in the region. Intraregional investment fell by 35 per cent to $21.9 billion, lower than the 2020 pandemic level of $22.4 billion.
Investments by Chinese enterprises are increasingly shaping the regional FDI landscape. FDI flows from China are growing especially in manufacturing, with an average annual growth rate of 33 per cent since 2020. More first-time Chinese investors along with existing ones are expanding in ASEAN in industries such as automotive, electronics and renewables.
Feldstein (2000) and Razin and Sadka (forthcoming) note that the gains to host countries from FDI can take several other forms:
*FDI allows the transfer of technology—particularly in the form of new varieties of capital inputs—that cannot be achieved through financial investments or trade in goods and services. FDI can also promote competition in the domestic input market.
**Recipients of FDI often gain employee training in the course of operating the new businesses, which contributes to human capital development in the host country.
***Profits generated by FDI contribute to corporate tax revenues in the host country.
Posted by gandatmadi46@yahoo.com