Beginners need first to familiarize with the term direct and foreign direct investment to fully understand how it works. Foreign direct investment (FDI) is simply a business investment in another country than yours with the goal generate profit. Direct investment means getting an equity interest without the traditional procedure of buying company shares in exchange for providing funding. It is usually used by international corporations who invest in different countries.
There are three types of investment. An investor can establish a brand new company which will operate from the selected country or extend their business to another country, as well as acquire a domestic company.
What is the Purpose of Foreign Investments?
First, of all, the big fish also called corporations want to gain access to more consumers and FDI is the perfect way to do it, especially in countries which have a bigger population. Countries which are fertile are usually states which are developing since their demand for consumer goods also rises with their incomes.
Big companies are always looking to cut costs, and opening an overseas company where the labor force is more affordable, represents a great way to do so. It is not only the affordable labor force, but production costs are also lower. Big investors usually target countries where employment laws are loose and regulations are hard to enforce, which leaves workers and staff with minimum rights. Many countries do not even have minimum wages. All of this enables companies to secure higher profits and increase their competitiveness.
Even if some countries are still facing challenges to attract FDI, the majority of developing countries have recognized the benefits of FDI to spur their economies, so their governments develop frameworks and policies to support FDIs. These governments usually offer incentives, tax benefits, and do other favors to improve the investment climate.
Another FDI interest lies in the fact that many of the developing countries are like raw diamonds, full of potential and rich in natural resources which could be turned into a gold mine with the appropriate capital. Therefore, investors and businessmen are looking forward to harvesting the fruits afterward.
What is in for the Beneficiaries?
The developing countries which are FDI-oriented usually have a labor force that is willing to work and professionally develop. That opportunity is provided under FDIs, so many domestic workers actually favor to work for the “newcomers.” It basically represents a win-win situation.
In some of these countries, FDI is the only way to increase employment rates, and the more people work, the better the economy. Even if investors gain some tax benefits, corporate and profit taxation remains in place. Governments can use the collected tax revenues for numerous activities, priority areas or welfare projects.
Investors sometimes import their own staff especially for key position, leaving the domestic workers with low-paid jobs only. There is also the risk that natural resources could be depleted since investors will probably have little regard to preserve the resources.