What does foreign investment mean

Foreign direct investment

Definition: What is Foreign Direct Investment?

Foreign direct investment (FDI) is a form of foreign investment. It is an export of capital carried out by a commercial enterprise in one country to another. The aim is to acquire real estate or foreign companies abroad, to set up subsidiaries or operating facilities. A stake in a foreign company can also be a direct investment if the stake is large enough to ensure decisive influence over the company.

Reasons for foreign direct investment

A number of reasons can lead companies to choose FDI. This includes:

  1. Deviating competition law regulations
  2. Tax advantages abroad
  3. Different factor prices
  4. Securing the delivery of raw materials
  5. Securing the delivery of preliminary products
  6. Circumventing trade barriers
  7. Development of new sales markets
  8. Preservation of existing sales markets
  9. Protection against political risks with the help of guarantees for foreign investments

Effects of Foreign Direct Investment

The effects of FDI are very complex. The following is an exemplary list of some of the effects on the region of origin:

  1. Production moves to low-wage countries
  2. New sales markets are emerging
  3. Promotes globalization
  4. Lower sales prices by lowering production costs
  5. Profit maximization
  6. Migration of technical know-how
  7. Job security abroad
  8. Risk of job loss for the low-skilled
  9. Suppliers are migrating
  10. Social spending is increasing
  11. Falling standard of living because the purchasing power standard is falling

Foreign direct investment can have positive effects in the recipient country. This is especially true when it comes to a developing country. Direct investment abroad can alleviate capital shortages. This has a positive effect on the country's economy. The consequences are an increase in productivity and employment as well as other factors of production. The investments can have a growth-accelerating effect because the macroeconomic investments increase. They relieve the balance of payments and have positive employment effects. They make a contribution to the diversification of the production structure and at the same time bring with them a technology transfer. They also entail investment and production activities in upstream and downstream production stages.

Foreign direct investment can also have negative effects. It can happen that the relocation of production displaces local producers. There may be welfare losses or an income transfer in favor of the investor because he takes advantage of state benefits, such as the free use of infrastructure services or a so-called protective pension to shield the market with import tariffs. Subsidized inputs and discounted loans are also part of this.

The Deutsche Bundesbank keeps statistics on German direct investments. The data is based on the inventory reports from domestic companies and private individuals on the "assets of residents in foreign economic areas", that is, German direct investments abroad, and the "assets of non-residents in the economic area", that means foreign direct investments in Germany. The scope of the information is based on the provisions of the Foreign Trade and Payments Ordinance (AWV) in Sections 64–66.

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German-English dictionary | Translation for Foreign Direct Investment

Foreign direct investmentdirect foreign investment
foreign direct investment