It is important to differentiate between FDI flow and FDI inventory when addressing foreign direct investment. The FDI flow applies to the FDI over a certain time (normally a year). The FDI’s portfolio corresponds to the cumulative amount acquired at a period by international property. Furthermore, we worry about FDI outflows, that is to say FDI outflow.
What you must know about FDI’s Growth?
The flow and stock of FDI in the world economy have risen markedly in the last 20 years. The FDI’s average annual outflow rose from around 25 billion dollars in 1975 to a record 644 billion dollars in 1998. In the 1980’s and 1990’s, not only was the FDI flow speeding up but also faster than global trade rise. There are numerous explanations why FDI raises global trade and world production. While trade barriers have decreased globally in the last thirty years, some protectionist pressure is still a source of concern for companies. Administrators see FDI as a way to bypass potential trade hurdles.
Secondly, much of the recent development of the FDI is motivated by drastic policy and economic reforms in many developed countries worldwide such as the vigorous promotion by fiscal and other rewards of industrial investment. The world economy has a good influence on the amount of FDI, too. It is important to remember that many businesses already expect their clients to have manufacturing facilities.
What are the Advantages of Foreign Direct Investment?
A company chooses FDI over exports as a breakthrough tactic. Since, when shipping, the prices or trade restrictions, make the overall export experience unattractive. The firms support FDI over licensing (or franchise options), whether the firms wish to retain or leverage its technical skills, business strategy or if the resources are clearly not subject to licensing.
The export requires the produce and selling of products to the receiving country. Licensing involves granting a foreign entity (the licensee) the right to produce and sell the firm’s product in return for a royalty fee on every unit the foreign entity sells.
Export limits – Transport costs and trade barriers also restrict the feasibility of an exporting approach. If freight costs are applied to manufacturing costs, transporting such goods over a long distance becomes unprofitable. This is especially the case for goods with a low value to weight ratio which can be manufactured virtually anywhere (eg cement, soft drinks etc).
Licensing limits. An economic theory branch known as internationalization theory aims to understand why businesses frequently choose FDI over the licensing approach as a way of inputting FDI.
The firms believe in the power of FDI, it is a better option than exporting.