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What is Foreign Direct Investment (FDI)?

  Foreign Direct Investment (FDI):

It is an investment made by investors or company in a foreign country. An investors or company should own 10% ownership in a foreign country companies. So, that the investment is known as foreign direct investment.

Types of Foreign Direct Investment:

There are three types of foreign direct investment:

  • Horizontal foreign direct investment
  • Vertical foreign direct investment
  • Conglomerate foreign direct investment

Horizontal Foreign direct investment: In this type of foreign direct investment the company expand its home country business in different countries. It means investor home country business is also open in different country. It will increase the market and also the profit of the company.

Vertical Foreign Direct investment: In this type of investment the company establish its business in foreign country where the production cost is less. In this investment the business activities of foreign company is same with home country. An investment helps to increase the value in supply chain.

Conglomerate Foreign direct investment: In this investment a company invest in other country business which is not related to the investing company's domestic business. 

Methods to invest in foreign country:

  • Merger and Acquisition 
  • Acquiring equity shares in a foreign country
  • Joint venture with foreign country company

 

Advantages of Foreign direct investment:

  • Expansion of market of a product which are available now in different countries.
  • Job opportunities:  If foreign company establish a company in developing country it will provide job opportunities in that country.
  • Growth of Economy: It increases the job opportunities that will increase the number of earning people in a country. It will increase the purchasing power of a person.
  • Expansion of technology: Foreign direct investment help in introducing new technology in the developing country.
  • Increase Tax: It helps to increase the tax revenue of invested country and the foreign company gets tax benefits for invested in that country.
  • Low cost of manufacturing: The product manufactures in large quantity because due to foreign direct investment the market size increases and it will lead to low cost of manufacturing a product.

Disadvantage of Foreign Direct Investment:

  • Domestic business face competition: The domestic business or local business where foreign company invest its capital to expand its business. In that country local business faces competition due to foreign company's product which has established name and market. 
  • Risk: Foreign direct investment is a risky investment if the rules and regulations in a invested country changes it may be give benefit to foreign company if it is favourable to them and if not it affects the business activities of a foreign company in a invested country.
  • Domestic business suffered losses: Due to FDI the domestic business suffered losses some times for not selling the targeted product in a specified period.Customers preference changes when new product comes into the market. Domestic businesses that are new in market are not able to establish a market for their product in front of established market of foreign company’s product. For which the new entrepreneur has to shut their business due to excess losses.

 

 

 


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