Read the notes, then try the practice. It adapts as you go.When you're ready.
Session Length
~17 min
Adaptive Checks
15 questions
Transfer Probes
8
Foreign direct investment (FDI) occurs when an individual or business entity from one country makes a substantial investment in a business interest in another country, typically involving the establishment of business operations or the acquisition of business assets such as ownership or controlling interest in a foreign company. Unlike portfolio investment, which involves passively holding foreign securities, FDI implies a lasting interest and a significant degree of influence over the management of the enterprise. The International Monetary Fund (IMF) defines FDI as an investment that gives the investor at least a 10 percent ownership stake in a foreign firm, distinguishing it from short-term speculative capital flows.
FDI can take several forms, including greenfield investments (building new facilities from the ground up), mergers and acquisitions (purchasing existing foreign businesses), joint ventures (partnering with a local firm), and reinvestment of earnings from existing foreign operations. The direction of FDI flows is classified as inward (foreign capital entering a host country) or outward (domestic capital flowing to a foreign country). Multinational corporations (MNCs) are the primary vehicles for FDI, and their investment decisions are influenced by factors such as market size, labor costs, political stability, infrastructure quality, tax incentives, and trade openness. The eclectic paradigm developed by John Dunning, also known as the OLI framework, explains FDI through three advantages: Ownership, Location, and Internalization.
FDI plays a critical role in the global economy by facilitating technology transfer, creating employment, boosting productivity, and integrating developing economies into global value chains. Host countries often compete to attract FDI through special economic zones, tax holidays, and streamlined regulatory procedures. However, FDI also raises concerns about economic sovereignty, profit repatriation, environmental degradation, and the potential for crowding out domestic firms. The net impact of FDI depends on the absorptive capacity of the host economy, the quality of its institutions, and the policies governing foreign investment. Organizations such as UNCTAD, the World Bank, and the OECD track global FDI trends and publish annual reports that inform policy decisions worldwide.
One step at a time.
A form of FDI where a parent company builds its operations in a foreign country from the ground up, including new production facilities, offices, and distribution hubs. This creates entirely new productive capacity in the host economy.
Example: Toyota building a brand-new automobile manufacturing plant in Mississippi, creating thousands of new jobs and adding fresh production capacity to the local economy.
A form of FDI in which a foreign investor purchases an existing company or merges with it to gain control. Unlike greenfield investment, cross-border M&A transfers ownership of existing assets rather than creating new ones.
Example: Anheuser-Busch InBev, a Belgian-Brazilian company, acquiring SABMiller in 2016 for over $100 billion to create the world's largest beer company.
A theory by John Dunning that explains why firms engage in FDI through three advantages: Ownership advantages (proprietary technology, brand), Location advantages (market access, resources), and Internalization advantages (keeping operations in-house rather than licensing).
Example: Apple manufactures in China (location advantage of lower labor costs), uses its proprietary technology (ownership advantage), and keeps tight control over production processes rather than licensing its designs to third parties (internalization advantage).
An agreement between two countries that establishes the terms and conditions for private investment by nationals and companies of one country in the other, providing protections such as fair treatment, protection from expropriation, and access to international arbitration.
Example: The United States has signed BITs with over 40 countries, giving American investors protections such as the right to international arbitration if a host government unfairly seizes their assets.
A geographically delimited area within a country that offers more favorable economic regulations, such as tax incentives, reduced tariffs, and streamlined customs procedures, to attract foreign and domestic investment.
Example: China's Shenzhen Special Economic Zone, established in 1980, attracted massive FDI inflows that transformed it from a small fishing village into one of the world's most dynamic technology hubs.
The pricing of goods, services, and intangible assets transferred between related entities within a multinational corporation across borders. It can be used strategically to shift profits to low-tax jurisdictions, raising regulatory concerns.
Example: A multinational corporation charging its subsidiary in a high-tax country inflated prices for components sourced from a subsidiary in a low-tax country, thereby reducing taxable income where tax rates are higher.
The process by which a multinational corporation transfers profits earned in a foreign host country back to its home country. High levels of profit repatriation can reduce the net benefit of FDI to the host economy.
Example: A U.S. technology firm operating in India sends its annual net earnings of $500 million back to its headquarters in California, reducing the capital retained within the Indian economy.
Crowding out occurs when FDI displaces domestic firms that cannot compete with the superior resources of foreign entrants. Crowding in occurs when FDI stimulates additional domestic investment through supply chain linkages, technology spillovers, and enhanced competition.
Example: Walmart's entry into Mexico initially crowded out small local retailers, but over time it crowded in investment from domestic suppliers who expanded operations to meet Walmart's procurement needs.
More terms are available in the glossary.
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