- General Characteristics of Foreign Direct Investment on Economic Growth
Towards the comprehension of the effect of direct investment by foreigners in any nation, it is vital to understand its central concepts, characteristics, types, and methodology on a general scale. In definition, foreign direct investment (FDI) is the process or act where a company, organization, or individual unit in a particular country or countries make an investment in another country (Crane 58). In general, FDI varies across many countries, where the type of economy is the primary determinant. Case in point, countries with economies that are open is more likely to attract FDI than those with closed economies. A skilled workforce, consistent growth, and economic and political stability are other determinants of foreign direct investment. It can decide to introduce a new idea or expand an existing business. The calculation of FDI is as follows (Bevan, Estrin and Meyer 30):
FDI=summation of equity capital, long-term capital, and short-term capital
- Characteristics of Foreign Direct Investment
Regardless of the level of foreign direct investment in any republic, various common characteristics apply to FDI on a general scale. The main characteristic as mentioned earlier is the intention of a foreign entity to participate in the control or management of a target company in another country (Bevan, Estrin and Meyer 44). First, the foreign entity participates through the funding of the company. The native country can also help in funding the company through the selling of shares; however, the foreign country takes care of all the major expenses such as shipping of heavy equipment. The management process must ensure that none of the countries will betray the contractor by failing to delegate the set duties.
It also participates in making the decisions concerning all sectors of the target company. In most cases, the foreign entity occupies the top positions of the business such as the managerial positions. It is a crucial necessity to ensure that all decisions made in the lower ranks pass before them for approval and correction. As such, it has authority concerning in which part of the country it will invest, how it will produce its goods and services, and the financial outcomes of the operations.
The second general characteristic of FDI is that it is a long-term obligation (Crane 58). As such, it protects the domestic economy and its industries from foreign entities who are only interested in making rapid capital profits. The long-term commitment can last up to 20 years or more or until the country begins to develop similar products and technologies to that of the target company. Long-term investments can provide tremendous support, especially for the developing countries. On the other hand, the foreign entity also benefits from it since it means more profits and increased trust between the two nations. The long-term commitment can also promote trade between the two countries and due to its greater economic growth; the native country can trade with other countries as well (Ek 9). Moreover, long-term investment portrays to the host country that the foreign entity is necessary and that it has the best interest at heart.
Another critical characteristic of foreign direct investment is the involvement of technological transfers and new markets. Genuinely, this means that the foreign country aims at accessing the new markets regarding raw materials that are adamant in their country but plenty in the native country (Haskel, Pereira and Slaughter 490). Case in point, a foreign country such as China might be interested in the untapped gold reserves or skilled personnel found in a developing country in Africa. The foreign country will then use those resources to increase its development. On the other hand, the host country benefits from the technological transfers brought by the foreign country. It must have a shortage of technology, which is a necessity for its development but the country cannot afford. In essence, there must be a surplus-deficit scenario, which will encourage the foreign direct investment in a symbiosis kind of relationship (Khaliq and Noy 5). As such, FDI cannot be possible if only one country will benefit from the transaction.
For foreign direct investment in many countries, it involves the setting up of physical assets such as buildings, factories, industries, and roads, among others. In essence, these physical assets play a huge role in increasing the development of the nation. In particular, the assets aid the target company by helping it to grow. Also, it provides employment not only for citizens of the foreign country but the host country as well. It also increments the productive capacity of the target company meaning that it can produce more commodities or offer more service (Haskel, Pereira and Slaughter 491). As such, assets are significant investments of the target company….