'FDI' the best Alternative for an Investment

FDI is Abbreviation for “Foreign Direct Investment”, where money from one Country (i.e Japan) is put into businesses in another Country (i.e Nepal).

Foreign direct investment (FDI) is an investment made by a company or individual in one country in business interests in another country, in the form of either purchasing a company in the target country by means of a merger or acquisition, setting up a new venture or expanding the operations of an existing one. Other forms of FDI include the acquisition of shares in an associated enterprise, the incorporation of a wholly owned company or subsidiary and participation in an equity joint venture across international boundaries.  

One of the advantages of foreign direct investment is that it helps in the economic development of the particular country where the investment is being made.

This is especially applicable for developing economies. During the 1990s, foreign direct investment was one of the major external sources of financing for most countries that were growing economically. It has also been noted that foreign direct investment has helped several countries when they faced economic hardship.

For host countries, inward FDI has the potential for job creation and employment, which is often followed by higher wages. Resource transfer, in terms of capital and technical knowledge, is also a key motivator that encourages inward FDI.

The advantages of foreign direct investment come from a long-term relationship between two countries. This happens when a country involves itself in the other country by transferring technology, expertise, or otherwise has an impact on its economy. This can spur the growth of that country’s economy and give birth to multinational corporations. It has an extraordinary role in maintaining the growth of global business as it can provide new markets and cheaper production facilities. The country at the receiving end benefits from the following types of resources.

Advantages

• Transfer of Technology (Resources transfer)
• Development of Human Capital Resources (Creation of New Job)
• Increment in Income (Overall Economic Growth)
• Access to Market
• Access to Resources
• Reduced Cost Production
• Easy International Trade
• Tax Incentives
• Reduced Disparity between Revenue and Cost
• Increased Productivity

      However, foreign direct investment also carries risks, and it is highly important for you to evaluate the economic climate thoroughly before doing it. 

Disadvantages

• Hindrance to Domestic Investment
• Risk from Political Changes (Unstable political and legal systems)
• Negative Influence on Exchange Rates
• Higher Costs
• Economic Non-Viability (Unstable economic conditions)
• Expropriation
• Negative Impact on the Country’s Investment\
• Modern-Day Economic Colonialism

      Investing into another country’s economy, buying into a foreign company or otherwise expanding your business abroad can be extremely financially rewarding and might provide you with the boost needed to jump to a new level of success. However, foreign direct investment also carries risks, and it is highly important for you to evaluate the economic climate thoroughly before doing it. Also, it is essential to hire a financial expert who is accustomed to working internationally, as he can give you a clear view of the prevailing economic landscape in your target country. He can even help you monitor market stability and predict future growth. 

In recent years, FDI has been used more as a market entry strategy for investors, rather than an investment strategy. Despite the decline in trade barriers, FDI growth has increased at a higher rate than the level of world trade as businesses attempt to circumvent protectionist measures through direct investments. With globalization, the horizons and limits have been extended and companies now see the world economy as their market. 

Additionally for investors, FDI provides the benefits of reduced cost through the realization of scale economies, and coordination advantages, especially for integrated supply chains. The preference for a direct investment approach rather than licensing and franchising can also been viewed in terms of strategic control, where management rights allows for technological know-how and intellectual property to be kept in-house. 

Remember that we live in an increasingly globalized economy, so foreign direct investment will become a more accessible option for you when it comes to business. However, you should weigh down its advantages and disadvantages first to know if it is the best road to take.