It refers to an investment made by a foreign individual or a business in the constructive capacity of another country. It is the movement of capital across national borders in a manner that allows investors to direct control over the investment. Multinational companies are business entities that provide foreign direct investment. Investors can invest directly in businesses that are already established and they can also promote them. There are two types of foreign direct investments: Outward and Inward (Lall, et al. 2013, 2013). Net foreign direct investment flows are created when both are accretive. Except for a few sectors like defense, coal, and lignite where foreign direct investment is restricted, it is permitted in almost all other areas. Foreign direct investment is prohibited beyond the ceiling. They provide capital for long-term development and access to advanced and developed technologies. Foreign direct investment is a great way to increase employment and international trade. The investment is not volatile and does not result in debt. Most of the returns are spent on the host country’s development (Moran T. H. 2012). The developing country, i.e. Asia attracted more foreign investment than the United States or the European Union. The investment is required by the developed countries for both cross-border and distant purposes. The world’s foreign direct investment fell 16 percent to $1.2 Trillion in 2014. The 2013 foreign direct investment increased 9 percent to $1.46 Trillion. Foreign investment can be in many forms, including portfolio investment, foreign loans, and portfolio investment. Foreign loans are used to build infrastructure. Foreign investment and economic growth are closely linked (Yarbrough, et al. 2014). To gain a sustainable competitive advantage, the countries need large amounts of foreign investment.
Benefits of Foreign Investment for the Recipient Country
International Trade Facilitated
Each country has its import tariff, making it difficult to trade. The recipient country has an advantage because international trade is easier and the sales goals are met.
Economic and Employment Boost
The benefit is given to the recipient country to create new jobs and new companies are created in that country to explore new opportunities. The economy is also boosted by the increased income and purchasing power of the recipients.
Development of Human Capital Resource
The country receiving the aid has the opportunity to develop its human capital resources. It is the knowledge of people who work as labor. Training and development help maximize the country’s human capital.
Reduced Disparity Between Revenues and Costs
Foreign investment is a benefit to the recipient country. This ensures that production costs are equal and can be sold easily by reducing the gap between revenue and cost.
Increase in Income
As the income grows, the greatest benefit for the recipient country is foreign investment. The national income is further increased when the number of jobs increases due to the higher wages and salaries. As a result, economic growth is encouraged.
The investors provide best practices, guidance, and accounting management to the recipient country (Blomstrom M. 2014). They can also use new technology and innovative practices in operations.
Disadvantages of Foreign Investment to the Recipient Country
Because the changes are instantaneous, the recipient country is exposed to political risks and foreign investment becomes riskier. The risks associated with these changes are also very high.
The Exchange Rate has a Negative Impact
Foreign investment can sometimes have an impact on the exchange rate, but it is not always beneficial for the recipient country. It is detrimental for the other.
The economy is not liable
Foreign investments can be considered capital-intensive depending on the perception of the investors in the recipient country. It may become non-viable or risky at times.
The Investment of the Country is negatively affected
Because of the rules and regulations that govern the foreign exchange rate, the recipient country is negatively affected. The result is that the opportunity to invest might be blocked.
Modern-Day Colonialism in Economy
Many third-world countries are concerned that foreign investment could harm their economy. This would make it vulnerable to modern colonialism.
The countries should limit foreign ownership of businesses in significant industries (Moosa I. This reduces the comparative advantage of the recipient country.
China takes over the US’s position as the largest recipient of foreign investment. China was the largest beneficiary of foreign investment in 2014 after the US was reformed. According to the UNCTAD (United Nations Conference on Trade and Development), the foreign investment inflow from China was increased by 3 percent to $129 Billion in 2014. The US saw a decrease in foreign investment inflows to $86 billion. In 2014, the US saw a drop in cross-border mergers and acquisitions sales to $10 billion. The UN was therefore responsible for international trade. In 2014, $111 billion was received by the Hong Kong region of China in foreign investment.
Due to the fragility of the global economy, geopolitical risk, and uncertainty of the policy, foreign direct investment fell. Due to the US high level of divestment, foreign investment flow decreased by 14 percent. The recovery of the US economy led to lower oil prices and a monetary policy in the Eurozone. This helped encourage foreign investment. (The Wall Street Journal & Breaking News, Business, Financial and Economic News, World News and Video, 2016). The UN body states that the outlook for global economic growth, volatility in commodity prices and currency markets, and the upraised geopolitical risks negatively impact foreign investment flows.