FOREIGN DIRECT INVESTMENT
What is Foreign Direct Investment?
FDI occurs when a firm or an individual invests in business interests located outside
their own country.
It can take several forms such as:
Establishing a new facility, like Tesla’s Gigafactory in Shanghai, China – In 2019,
Tesla invested over $2 billion to build a new factory in Shanghai, allowing the
company to expand in China’s EV market, reduce costs, and avoid import tariffs.
Acquiring an existing company, like Jollibee’s acquisition of The Coffee Bean &
Tea Leaf (CBTL) in 2019 – Jollibee Foods Corporation (JFC), the Philippines’
largest fast-food chain, acquired 100% of CBTL for $350 million, expanding its
global footprint in the coffee industry.
Investing in foreign companies, such as Japan’s Mitsubishi Corporation’s
investment in Ayala Corporation’s energy unit – Mitsubishi Corporation acquired
a 20% stake in AC Energy, a subsidiary of Ayala Corporation, to expand its
renewable energy projects in the Philippines.
FDI INFLOWS AND OUTFLOWS
Inflows : foreign investments coming into a country
Outflows : domestic companies investing abroad
Net flow : the difference between inflows and outflows
A positive FDI net flow occurs when a country receives more FDI inflows than it
sends out as outflows. This means foreign investors are putting more money into
the country than domestic investors are investing abroad.
A negative FDI net flow happens when a country’s FDI outflows exceed its
inflows.This means local businesses are investing more in foreign markets than
foreign investors are bringing into the country.
Which is better?
Positive Net Flow - is generally favorable for developing countries as it brings in
foreign capital, creates jobs, and boosts economic growth. However, excessive
reliance on foreign investment can make the economy vulnerable to external shocks.
Negative Net Flow - is more common in developed economies, where strong
domestic businesses expand globally by investing in foreign markets. While this helps
companies grow internationally, too much capital outflow without reinvestment at
home can slow domestic economic growth.
Balanced Approach - A country benefits from a mix of both—attracting FDI inflows
while also encouraging domestic firms to invest abroad. Ideally, a country should aim
for sustainable FDI that aligns with its long-term economic goals, ensuring growth,
stability, and global competitiveness.
TYPES OF FDI
Horizontal FDI - A company expands its operations into a foreign country by
replicating its home country business model in the same industry.
Example: McDonald's opening outlets in India
Vertical FDI - A company invests in a foreign country to control different stages of its
supply chain
Example: Apple investing in an iPhone manufacturing plant in China, then invests in
foreign retail stores to sell its products.
Conglomerate FDI - A company invests in a foreign country in an industry different
from its core business.
Example: a U.S. car manufacturer investing in a food business in Japan
Platform FDI - A company invests in one country to produce goods or services that
will be exported to a third country.
Example: Samsung established manufacturing facilities in Vietnam to produce
electronics, particularly smartphones. These products are then exported to global
markets like Europe and North America.
CHALLENGES OF FOREIGN DIRECT INVESTMENT
Political and economic risks
- Countries face varying levels of economic and political instability.
- High-risk regions often have unstable governments and weak economies.
Cultural and regulatory differences
- Business laws and regulations vary widely across countries.
- Some countries have complex bureaucracy, making market entry difficult.
Exchange rate fluctuations
- Currency values change frequently, affecting global trade.
- Businesses must hedge against foreign exchange risks.
High initial capital investment requirements
- Entering new markets requires significant startup costs.
- Infrastructure, licensing, and marketing contribute to expenses.
IMPORTANCE OF FOREIGN DIRECT INVESTMENT
Boosts economic growth and job creation
- FDI stimulate economic development by injecting foreign capital into various
sectors such as manufacturing, services, and infrastructure. This expansion leads to
increased production, higher GDP, and employment opportunity.
Enhances technology transfer and innovation
- FDI allows host countries to gain access to modern technology, machinery, and
expertise from foreign investors. This fosters innovation and improves production
efficiency.
Improves global trade relationships
- When foreign companies invest in a country, they create stronger economic ties
between the host and investor countries. This leads to improved trade agreements
and the expansion of international markets.
Increases capital inflow into the host country
- Foreign investment provides financial resources that can be used for infrastructure,
industry, growth, and public projects. This is especially beneficial for developing
countries that lack sufficient domestic capital.
Presented by:
Group 2
MEMBERS:
BERNARDO, FATIMAY N.
BERNIL, WILVIANE GRACE A.
EVANGELISTA, KRZTEL P.
GARCIA, JOHN ACE M.
MENDOZA, JOHN PAUL
BSAC 3B
