Foreign Direct Investment (FDI) Due to globalization and hyper competition, it became crucial for the countries to engage in the global economy in order to survive and develop.
One way to do so is through foreign direct investment. “Foreign direct investment (FDI) occurs when a firm invests directly in production or other facilities in a foreign country over which it has effective control”. (Shenkar & Luo, 2007, p.
60). It provides benefits for the multinational enterprises investing in a foreign country and for the host countries. Benefits for the Multinational enterprises:From investing in a foreign country, the MNE can have access to resources, cheap labor cost, new market opportunities, and new skills, thus, the productivity of the MNE will increase. Also, the MNE can benefit from avoiding the costs associated with trade barriers, customs, and tariffs.
In addition, MNE benefits from the diversification of its operations. Due to the increased competition and the constant change in the economy, it is crucial for an enterprise to invest in more than one country to maximize revenues, reduce risk, and prosper more quickly.Moreover, MNE can benefit from investment incentives provided by the government of the host country and from flexible regulations. It can also benefit from the structural discrepancy of the host country (i. e.
growth, competition, consumer purchasing power). For instance, a company producing air conditioners in Lebanon will not make high profits as the electricity cost is high and the weather is good. However, a FDI in Qatar will generate high profits as the electricity cost is low and the weather is humid.Thus, there will be a higher market demand in Qatar than in Lebanon. Furthermore, according to Shenkar & Luo (2007, p. 65), “FDI expands the market domain in which an MNE capitalizes on its core competencies, generating more income from existing resources, capabilities, or knowledge”. Nevertheless, the MNE gain more knowledge and capabilities when it enters a new market because it learns a new culture, new ideas, new rules, and new competition.
All these benefits grant the MNE a competitive advantage.Benefits for the host countries: First, the economy of the host country will flourish because FDI represents an important source of finance for it. Also, the foreign country provides technology that facilitates business transactions, enables efficient use of resources, ameliorates the quality of product/service, and increases the level of production. In addition, investing in a host country provides managerial skills which are essential to explore opportunities and reach targets.Moreover, FDI increases the level of employment in the host country because the foreign company establishes new plants, factories, and offices that require hiring employees. And thus, as the level of employment increases, the standard of living increases too. As well, the skills and capabilities of the new employees will be developed as they receive trainings and knowledge from the foreign company.
Furthermore, as the foreign company pays taxes, the host country benefits from the income generated from them. And when the FDI inflow increases, local companies will be motivated to invest more.Also, FDI improves the infrastructure of the host country because for the foreign company to invest and operate, the infrastructure should be consistent with its investment needs. Nevertheless, the productivity of the local companies increases as they learn from the MNE. As a result, these benefits boost the economy of the host country and improve its performance. So, the host country will be able to engage in the global economy and take advantage of its competitive characteristics. To illustrate an example, CAT Company is a building company located in Lebanon.
However, due to the instability of the economy, it established a branch in Qatar to benefit from the strong economy and the market demand. This investment enables it to reduce the risk of being bankrupt and it increased its production and market share. In conclusion, due to the rapid growth of the economy, countries should adapt to the global economy in order to compete and survive.
FDI is powerful solution for countries to generate revenues and reduce risk. ” Foreign direct investment is thought to be more useful to a country than investments in the quity of its companies because equity investments are potentially “hot money” which can leave at the first sign of trouble, whereas FDI is durable and generally useful whether things go well or badly” (Foreign direct investment, 2007). Resources: * Articlesbase (2007) Foreign Direct Investment [Online]. Available from: http://www.
articlesbase. com/business-articles/foreign-direct-investment-178600. html (Accessed: 13 November 2010). * Shenkar, O. & Luo, Y. (2007) International business.
2nd ed. Thousand Oaks, CA: Sage Publications.