Merits & Demerits of Foreign Direct Investment

Foreign direct investment is the direct investment into a business or sector by a company or individual from another country, differing from portfolio investment, which is a more indirect investment into another country’s economy by means of financial instruments such as stocks and bonds.

INVESTMENTS COME IN MANY SHAPES

There are various forms and levels of foreign direct investment, depending on the type of company or companies involved, and the reasons for investment. A foreign direct investor may buy a company in the target country, set up a new business, or expand the operations of an existing business. Other forms of direct foreign investment include the incorporation of a wholly owned subsidiary or company, the acquisition of shares in an associated enterprise, or participation in an equity joint venture across international boundaries.

ADVANTAGES OF FOREIGN DIRECT INVESTMENT

It can stimulate the economic development of the country in which the investment is made, creating both benefits for local industry and a more conducive environment for the investor.

It will usually create jobs and increase employment in the target country.

It will enable resource transfer, and other exchanges of knowledge whereby different countries are given access to new skills and technologies.

The equipment and facilities provided by the investor can increase the productivity of the workforce in the target country.

DISADVANTAGES OF FOREIGN DIRECT INVESTMENT

Foreign direct investment can sometimes hinder domestic investment, as it focuses resources elsewhere.

Occasionally as a result of foreign direct investment exchange rates will be affected, to the advantage of one country and the detriment of the other.

Foreign direct investment may be capital-intensive from the investor’s point of view, and therefore sometimes high-risk or economically non-viable.

The rules governing foreign direct investment and exchange rates may negatively affect the investing country.

Investment in certain areas is banned in foreign markets, meaning that an inviting opportunity may be impossible to pursue.

BALANCING RISK AND REWARD

Expanding your business abroad, buying into a foreign company or otherwise investing into another country’s economy can be extremely financially rewarding, and may provide your organisation with the boost it needs to jump to a new level of success. However, direct foreign investment is also fraught with risks, and it is vital to investigate and assess the economic climate thoroughly before venturing into such an investment.

This is where your organisation can benefit from hiring a financial expert accustomed to working internationally – he or she will be able to give you a clear and thoroughly researched picture of the prevailing economic landscape in your target country, as well as monitoring the stability of the market, and predicting its future growth.

We live in an increasingly globalised economy, which means that foreign direct investment is becoming a more and more accessible option. Potential foreign direct investors, with the right expertise and planning, will find that the world is their oyster.

Source: http://blog.mbaco.com/foreign-direct-investment-merits-and-demerits/