Foreign direct investment is a real investment in the equity of an enterprise, in land or fixed assets, which provide the investor with full or partial participation in management.
This type of investment was widely spread due to the development of transnational corporations, which, for a number of reasons, was profitable to invest part of in other enterprises, increasing profits and, as a rule, getting them in ownership (often such enterprises are part of TNCs as a subsidiary). In some cases, direct investment is also a political leverage.
Direct investment is any investment in excess of 10% of the property. Part of the participation in equity may be obtained in exchange for personnel, technology and other tangible and intangible benefits.
The most active foreign direct investment compared with world trade began to increase, starting in the 80s. The reason for this was the integration of production, the general processes of globalization, the increased role of transnational corporations, the economic policies of developed countries, and the willingness of third world countries to create conditions for attracting such investments to the economies of their countries.
Factors that Stimulate Foreign Direct Investment
Marketing factors are one of the most important. Growing TNCs need to expand the market to maintain and increase their sales. The limited size of the domestic market makes it necessary to geographically diversify production.
Trade restrictions - foreign direct investment enables TNCs to circumvent trade restrictions and operate quietly abroad as local firms, which saves on import payments and cargo customs clearance. This is also done to increase the loyalty of customers who prefer to purchase goods from a domestic manufacturer.
Cost factors - very often direct investments and, as a result, the creation of an enterprise in another country can save on the most important types of costs - raw materials and labor costs. This is what makes large firms transfer their production to less developed countries, which allows several times to reduce the cost of production. Moreover, this can increase the reliability of sources of raw materials. Another reason is that it is often easier and cheaper to install your own quality control system at a new enterprise and import your own technologies than to manage goods flows from the parent company.
The investment climate in the invested country is also a very important factor. Some countries, for example, Canada, actively support their own producer and introduce high import duties, which makes direct investment in the economy more profitable for foreign entrepreneurs than regular import.
Another important factor is the perfection of the legal framework that protects investor rights from nationalization or discrimination, as well as maximum economic and political stability in the country. Foreign investors can be discriminated against in the form of a special type of taxation, price control, restrictions on placing orders, restrictions on transferring money, and restrictions on emigration of labor resources. The investment climate also loses if there is a high probability of currency risks in a given country.
Assessing the attractiveness of a particular country for foreign investment is carried out using a specific system of indicators, which includes more than 340 indicators and many expert assessments.
Today, the United States, Canada, Germany, Switzerland, and the countries of the Pacific basin are considered the most attractive for foreign direct investment.