The expression foreign direct investment (FDI) is one that has become very popular in the present dispensation. This is because there is definitely a connection between the present atmosphere of globalization and the concept of foreign direct investment. More to the point, liberalization in some countries seems to encourage foreign investors to set up businesses in these countries.
In very simple terms, FDI can be described as a situation whereby a foreign company sets up an enterprise or buys into an already existing enterprise outside the economy of the investor. In case this definition is not clear enough, it can be made even clearer. If an American company decides to invest in nearby Mexico, this can be considered a very good example of FDI. In most cases, the normal practice would be for the investors from a stronger economy to invest in smaller economies. Thus, most people associate FDI with American countries operating in Mexico, China, Brazil or smaller countries in Africa and Asia.
In business, the investor invests in a particular location because there are definite advantages in those places. Some reasons for direct foreign investment may include lower taxes, low costs of labor, tax concessions or superior currency value. Other advantages may include the presence of large markets in the foreign countries and favorable banking policies. In some cases, certain countries encourage investors to invest in the industries where local investors may not be able to cope. A very good example is the oil industry in Angola. This country is still recovering from the effects of a long civil war and this is why its oil and gas industry is dominated by foreign players who have joint ventures with the federal government of Angola. Another good example is the fact that Niger republic (next door to Nigeria) has just commissioned its first refinery which was built from scratch by a Chinese company.
Of course, it does not always follow that business men from the developed countries will always invest in the developing economies. There are instances where investors from developing nations can invest in the developed economies of Canada, America and Europe. For instance, there are investments in America owned and operated by rich investors from Dubai, Saudi Arabia and Kuwait. There are also reputable firms in the UK controlled by investment firms from South Africa, India and Brazil.
It has to be pointed out that there are instances where politics may play very important roles in foreign direct investment. For instance, no country will want its arms industry to be controlled by any foreign firms for very obvious reasons. Meanwhile it has to be stated as well that investors are in business to make profit. For this reason, they will not invest in countries where the government policy is inconsistent. Countries which have nationalized foreign investments in the past will find it very difficult to attract foreign investors. By the same token, countries which are known for political instability may not be able to attract investors unless the system is sanitized.
All told, foreign direct investment is a great idea under the right conditions. The investor makes profit and the country gets the benefit of development and creation of employment for its citizens. These are some of the points in favor of foreign investment for investor and host country.