An FDI or foreign direct Investment has many definitions. In simple terms, it is the investment made by company based in a particular country in a company based in some other country. This investment is different when compared to other investments which a country does indirectly in other countries. In modern days, FDI has gained momentum and a good example of such type of investment is the Microsoft Company or the Facebook investing in other countries like India and China.
Different ways in which FDI can be done:
There are a number of ways in which one country can invest in other countries. Here are some of the ways.
- A country who wants to invest in other countries can purchase a specific company in a particular country and start up a new one.
- FDI can be done by purchasing some shares of a company based in another company.
- Another way to invest in other countries is to start a new company in the partnership of a company based in the targeted country.
FDI has gained popularity due to the amount of profit it generates by investing in foreign countries. Investing a huge amount in any company raises less profit than investing in foreign companies. The profit generated has become a major factor in the growth of FDI in the business world throughout the globe. Investing in foreign countries not only provides a new and fresh marketing place but also provides many other beneficial things like technologies, new products, less cost, and many more.
Let us have a look at the advantages of FDI:
Helps in economic growth of the country:
FDI can serve as the factor which can increase the economy of a particular country. It can be beneficial for both the countries; the country which is investing and for the country in which the investment is done.
It makes the trade between two countries quite easy:
You can find in any country that there are different tariffs imposed on imports and exports. This tariff makes it difficult for foreign countries to visit other countries and carry on their trade. FDI can make it easier to trade internationally.
Increases the employment opportunities:
Investment in other countries gives a direct boost to the number of job opportunities. With the development of new companies, the opportunities also increase. In other hands, it also boosts the economic condition of the country also.
It provides a perfect platform for the rise of human resources:
The biggest advantage of FDI is the increase in the HR capital of a country. Mostly many countries lack skilled labor and man force to perform a particular job. With the foreign countries investing and the training provided for the job, the quality and skills of the labors also increase. Labor gain a lot by sharing their knowledge and experience with each other.
You can gain by providing expertise to other countries:
Often due to the lack of expert persons or the latest technology, many companies can ask for some expert help for them. In return for providing the latest technology or product, the investor can ask to impose some tax on the facility it will be providing.
Transfer of technologies and other resources:
With the FDI, countries will have the luxury of transferring required resources and modern technologies as well and the knowledge to other countries.
Maintaining control over the production and selling cost:
It is often the case that the production cost exceeds the selling cost when sold in foreign markets. With the upcoming of FDI, a proper balance between the production price and selling price can be maintained. It can be made sure that the product can be sold in a proper way.
Rise in income:
One of the most important advantages of FDI is the increase in the income in the country which investment is made. With the increase in the number of job opportunities and higher salary amount, the economy of a country is bound to grow.
FDI is basically an act of searching markets in other countries for a better business opportunity. This is not an easy task as it needs expert people to perform such activities. Normally, the companies which are thinking to follow or use FDI have to take the help of an expert person or organization. This organization will work accordingly to the requirements of the company. It will search the market of different countries and would provide the cheapest investment option.
Although it might look that FDI is totally beneficial and has no consequences or disadvantages but the truth is just opposite. There are various disadvantages of going with the FDI.
Here are some of the disadvantages of FDI:
It can cause a loss to the investment made in domestic markets:
With the FDI, the goal is to invest in other countries rather than investing in the domestic market. This can cause a huge loss for the domestic market.
Change in the political situation can pose some risk:
Going with the FDI in countries governed by politics is a danger. Any change in the political situation can be risky.
It can have an adverse effect on the exchange rates:
FDI can serve as one’s loss is another gain. Similar can be the case of exchange rates prevailing in the investor country and the target country.
Looking for an opportunity to invest in another country and expanding the business is quite a good option. There are always two sides of a coin. If there are advantages of going with the FDI, then there are disadvantages and risks involved also. It becomes important to first get a good knowledge of the country’s market in which you are going to invest. The risks involved are high. So, it is necessary to take the help of some experts. It becomes important to hire an expert with the amount of risk that is involved in investing in foreign countries.
FDI is a great option when compared to any other investments or business if the risk factors are taken care of properly.