Foreign Direct Investment

Foreign Direct Investment (FDI)

What it is? Why companies want to spend in other countries companies? How it helps the Businesses?

Foreign direct investment is the purchase of physical assets or a significant amount of the ownership of a company in another country to gain a measure of management control. Company invest direct in production facilities overseas rather than domestically. This includes giving the licence to allow the rights to manufacture company’s products to an overseas company franchise its operations to an overseas company.

Why a company wants to be a multinational company? Well mostly the company’s wants to grow their business and get high profits to improve the image and reputation. As most of the companies are market seekers, some companies can be raw material seekers as they want to improve the quality of the products as they are products and production efficiency seekers. Some companies are also political safety seekers.

Theories of FDI are not mutually exclusive but they can be viewed as collective. Transportation costs incurred when exporting goods. Particularly effect goods that are low value and high weight and can be easily produced any location for example cement. That makes Foreign Direct investment more attractive. Government is the main service of these through the imperium of the tariffs and quotes. These decreases the profitability of exporting and that makes FDI and licensing more attractive too. Companies may have competitive advantage through technology, management and marketing knowhow as well through their core product. Locating particular economic activity in a specific location gives a company a location advantage. The ownership of some special assets, powerful brand, technical advantage, and knowledge and management ability gives a company an ownership advantage.

According to the BBC News (3^rd march 2013) Europe's most senior trade official has said that a free-trade agreement between the US and European Union would boost its growth by as much as 1%, leading to many more jobs. The deal would be the biggest free-trade agreement in history. EU Trade Commissioner Karel De Gucht said that both were still "suffering the effects of the earthquake that hit our economies in 2008".                                                                                                   

"This is the cheapest stimulus package you can imagine," he told an audience at Harvard University on Saturday, saying that for the EU, "the income effects of the deal that we are now trying to achieve should be between 0.5% and 1% of GDP, meaning hundreds of thousands of jobs"

A deal would bring down trading barriers between the two biggest economies in the world. The EU estimates that a "comprehensive and ambitious agreement" will boost annual GDP growth by 0.5%.Mr De Gucht also noted that trade talks at the World Trade Organization had stalled, "largely because of differences of view between developed powers - like the US and the European Union - and the rising stars.

"An EU-US partnership can act as a policy laboratory for the new trade rules we need - on issues like regulatory barriers, competition policy, localisation requirements, raw materials and energy."This can improve the relation between the two countries and can help to boost the economy. There will a lot of the competitors are there in the market to follow them as the following competitors always try to be aware of the acts of the other successful companies .e.g. knickerbockers (1973).