Foreign direct investment (FDI)
Foreign direct investment (FDI) refers to the investment made by individuals or businesses from one country into the businesses of another country, granting significant influence in the foreign enterprise's decision-making processes. FDI typically occurs in open and less regulated economies with a capable workforce and promising growth prospects, encompassing not just financial capital but also technology and management. The impact of FDI on local economies is a nuanced topic; while it can enhance productivity and economic growth, its benefits are not guaranteed, necessitating policies that support local human resources and skills development.
Historically, the role of FDI has evolved, with increased scrutiny and debate over its advantages and risks. In the United States, FDI plays a crucial role, contributing to millions of jobs and significant exports. However, concerns have emerged, particularly regarding the influx of investments from countries like China, which has raised fears about national security and economic sovereignty. As global competition for FDI intensifies, many countries face pressure to balance attracting foreign investments while safeguarding local interests. Despite challenges and a growing trend toward protectionist measures, FDI remains a fundamental component of the interconnected global economy, continuing to drive growth and job creation worldwide.
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Foreign direct investment (FDI)
An investment made by either an individual or a business from one country in the businesses of another country is called foreign direct investment (FDI). A central characteristic of FDI is that it gives significant power and/or influence in the decision process of a foreign business. Typically, FDI occurs in open, less regulated economies that have a capable workforce and offer investors solid growth prospects. Technology or management, not just money, is typically part of the investment. The investment may occur in a number of ways, such as a subsidiary, an associate company, or a merger.
Background
In the 1960s, the United Nations had its first Development Decade. Since then, the role of FDI has been contested. Proponents believe it grows the economy and makes it more productive. Countries with a positive view of FDI use economic policies to attract investment and offer a welcoming climate. Those who argue against FDI say it brings too many risks. Beginning in the 1990s, FDI has been viewed in a nuanced way. The type of FDI is relevant in terms of its impact on the economy. FDI is viewed positively with regard to technology and capital, but the development of the local economy is not inevitable. For local communities to benefit from FDI, policies must focus on bolstering local human resources and high-tech skills.
FDI plays a major role in the US economy as more foreign investment exists in the United States than in any other country. According to the International Trade Administration, in 2013 FDI contributed to 12 million jobs, which is 8.5 percent of the total US labor force. Of these 12 million FDI jobs, 6.1 million were created directly, and the remainder relied indirectly on FDI. Foreign companies invested $53 billion into American research and exported goods worth $360 billion. According to Andreas Dressler in Site Selection Magazine, some of the largest investors in the United States are the United Kingdom, Germany, Canada, Japan, and China. Japan alone accounted for 20 percent of all FDI in America in 2013. China's investment in the United States is growing, with a large dose of cash invested since 2009. Two sectors of the American economy that saw the greatest inflow of FDI are manufacturing and pharmaceuticals.
According to the Organization for International Investment, the United States was not the top choice for FDI in the year 2014, however, as it fell by 50 percent from the previous year. Both China and Hong Kong passed the United States as the world's preferred location for investment. The United States' share of worldwide FDI, which was 39 percent in 2000, slipped to 21 percent by 2014. Competition for FDI continues to grow.
Overview
When industries experience technological innovation, prices of the associated product come down and enhance FDI. For example, fracking, an innovation in oil exploration, led to an increase in US oil and gas production and an increase in FDI. Foreign companies invested in exploration, refining, and manufacturing equipment in their quest for oil. When natural gas prices declined in the United States due to fracking, foreign companies invested in that sector.
FDI has been directed toward the United States due to its extensive higher education system, which makes for a skilled workforce. The powerful consumer market, a large private equity and venture capital market, and the risk-taking and innovative culture that pervade the country also drive FDI.
FDI may be labeled as either inward or outward. Inward FDI occurs when foreign capital is put into local industry. Factors involved that encourage inward FDI are tax breaks, low interest rates, and grants. The government accepts the risk with outward FDI. When the investment in a foreign company is 10 percent or greater, investors receive voting and management rights.
A number of concerns surround FDI. For example, in the United States, two sectors—automotive and aerospace—have been of concern regarding FDI. FDI in these two sectors saw a 90 percent decrease in inflows from 2009 to 2013, according to Dressler in Site Selection Magazine. Another concern is the surge in Chinese FDI. A 2016 article by Andrew Soergel in U.S. News & World Report notes that the term "Made in America" seems to be changing to "Made by China … in America," as the Chinese buy up American-based companies. In the first few months of 2016, the Chinese expressed interest in or closed on a few multibillion dollar American companies, including the Chicago Stock exchange. Chinese investments in American technology or telecommunications remain particularly sensitive. Early in 2016, a Chinese company made a bid for Fairchild Semiconductor International. Ultimately, the Chinese bid was turned down, and a lower bid by an American company was accepted. Fairchild likely made this decision due to concerns that the Chinese deal would be rejected by federal regulators. Indeed, the Chinese made ten bids for semiconductor companies (mostly US companies) in a one-year span. Semiconductors are included in a significant number of military systems; therefore, the attempted purchase of the company drew the attention of the US government. The Chinese have been turned away from buying a number of American companies.
Some view the concern about China's FDI in the United States as excessive. FDI by a company does not mean the government under which that company operates is somehow gaining an advantage over the foreign government. For example, the US government does not necessarily gain more say in the marketplace of another country when an American company invests in that country. However, the Chinese government's involvement in the private sector sends a red flag to the United States and that is where the concern lies.
Some countries have experienced a backlash against FDI. As a result, they have engaged in protectionist actions, such as strictly monitoring mergers and acquisitions and enforcing regulations on FDI. Despite some calls for protectionism, it seems that FDI is likely to continue. The world economy has become interconnected. While regulations and restrictions may increase, FDI has made a positive impact by growing the economies and increasing the number of jobs in countries around the world, particularly in the United States.
Bibliography
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"Definition of Foreign Direct Investment (FDI)." Economy Watch, 29 June 2010, www.economywatch.com/foreign-direct-investment/definition.html. Accessed 1 Jan. 2017.
Dressler, Andreas. "Is FDI Still Booming?" Site Selection Magazine, Nov. 2015, RLINK "http://siteselection.com/" siteselection.com/issues/2015/nov/fdi-in-america.cfm Accessed 1 Jan. 2017.
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Soergel, Andrew. "China Is Buying Its Way into the U.S. Economy." U.S. News & World Report, 17 May 2016, www.usnews.com/news/articles/2016-05-17/china-is-buying-its-way-into-the-us-economy. Accessed 1 Jan. 2017.
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