Foreign Direct Investment in Economics

ECONOMICS
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FOREIGN DIRECT INVESTMENT
In general terms, foreign direct investment can be defined as investment done by a company or
an individual of one country in the business interests of another country. It can be in any form
such as establishing business or acquiring assets in another country, either full ownership or
control up to a certain percent can be there (Roberts, 2015). The concept of foreign direct
investment provides high growth prospects for the investors. It is not just an investment in
capital, it may involve management and technological skills as well.
The different types of foreign direct investments are as follows:
 Inward, outward and net foreign direct investment
 Real estate investment
 Portfolio investment
In this assignment, the major focus will be on inward foreign direct investment. When in a local
economy, either a foreign or external entity invests or purchases the goods, and then it can be
termed as an inward foreign direct investment. Foreign investors include:
 Multinational companies
 State-owned enterprises
 Sovereign wealth funds
 Private equity companies
 Private investment funds including pension funds
 Other private investors
India, being the fastest growing economy of today, many foreign investors are seeking for
investing their money and expecting high growths in the economy. India is considered as the
most politically stable and secure country (ICAI, 2017). Other factors which are taken into
consideration before investing in a foreign country can possibly be infrastructure, exchange
rate, cost and skills of labour, available talent, real estate etc.
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Below is the figure showing foreign direct investment inflow, globally and by a group of
economies from 2005 to 2016 and projections for 2017-2018 are also shown.
[Source: http://unctad.org/en/PublicationsLibrary/wir2017_en.pdf]
There can be several motivating factors and drivers which encourage foreign direct investment
in the developing economies, some of the possible factors are:
 Companies may go for foreign direct investment to seek the natural resources available
in the foreign market.
 Market-seeking can also be a relevant factor for the companies to invest in foreign
markets for their growths.
 For seeking efficiency, for instance, the companies of US are setting up manufacturing
units in India to take advantage of cheap labour.
 Many companies or individuals invest in foreign markets to spread their risks.
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INWARD FOREIGN DIRECT INVESTMENT
By the terms inward and investments, it can be explained that money is brought into a region
from an external source, may be to carry out certain functions or to purchase the capital goods.
Foreign direct investment became an on-going rise in the recent years and became necessary
for globalisation. The reports of UNCTAD (united nation’s conference on trade and
development) states that the inflow of foreign direct investment is decreased by 2% to
$1.75trillion in 2016 resulting in low economic growth and higher policy risks (Blonigen and
Piger, 2014).
[Source: http://unctad.org/en/PublicationsLibrary/wir2017_en.pdf]
In the developed economies, the inflows are increased and a significant growth can be seen in
the previous year. The rate of inward FDI rose by 5% to $1 trillion. The share of developed
economies in the inflow of global FDI grew to 59%. In the transition economies, the inflow of
FDI is almost doubled to $68 billion, after two years of continuous decline. The rate of outflow
of foreign direct investment from developed countries declined by 11% to $1 trillion. The policy
measures which are introduced in 2016 were majorly aimed at the promotion of investment
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