FDI and its Effects

Question: Write about the FDI and Its Effects. Answer: Introduction Types of Foreign Direct Investment Foreign Direct investment is an activity where a company situated in one country invests their money in another foreign company. According to Saini (2012), Foreign Direct Investment is mainly of two types. They are horizontal investment and vertical investment. In horizontal investment, the foreign companies establish their plant in the domestic country. The companies take help of raw materials, labor and other materials of the domestic country and produce their products. The foreign countries sell the product in the domestic country and are in direct competition with the local manufacturers. On the other hand, vertical investment is a procedure in which the foreign enterprise exports the raw materials and labor from the foreign country to their domestic country. Even the foreign enterprises export the raw materials to other countries. Strategic Goals of Multinational Enterprises Undertaking FDI The main goal of the multinational organization in undertaking FDI is to have a competitive advantage. With the help of FDI, the companies can have access to cheap raw material and cheap labors. This will help the organizations to reduce their cost of production and increase their profit levels (Labes 2015). Along with these, the multinational companies will also be able to spread their business in remote places and can expand their business. Many untapped regions will also help the Multinational companies to grow their business volume. Another significant goal of the Multinational enterprises is to develop the economic condition of the society and country as a whole. FDI Distribution Pattern In the recent century, globalization is the process which helps Foreign Direct investment to develop at a rapid pace. Globalization also plays a major role in multilateralism. According to Krautheim (2013), economic reforms are also done through Globalization. Most efficient sources are exported to various destinations with the help of FDI. Capital transfer is also a two-way process which helps both the home country and the host country to develop quickly. Moreover, people now have greater exposure to different products which have been available through Globalization. Advantage and Disadvantage of FDI Foreign Direct investment helps the organizations to have a skilled labor at a lower price. The training and sharing experiences will help both the human resource and the organizations to develop as a whole (Estrin and Uvalic 2014). New technologies are also used with the help of FDI. For example, new manufacturing machines with latest technologies are being transferred from one country to another. FDI has created new job opportunities for the young generation. This will increase the economic growth of the region. The local producers will face a stiff challenge from the foreign companies. The level of competition will be high. Unrest in political conditions will also affect the progress of FDI. FDI will also have a negative influence on the exchange rate of currencies (Labes 2015). It has often been found that while exporting goods to foreign countries economically backward countries face losses. Thus these are the advantages and disadvantages of the foreign direct investment. References Estrin, S. and Uvalic, M. 2014, "FDI into transition economies: Are the Balkans different?",Economics of Transition,vol. 22, no. 2, pp. 281-312. Krautheim, S. 2013, "Export supporting FDI",Canadian Journal of Economics/Revue canadienne d'conomique,vol. 46, no. 4, pp. 1571-1605. Labes, S. 2015, "FDI DETERMINANTS IN BRICS",CES Working Papers,vol. 7, no. 2, pp. 296-308. Saini, M. 2012, "India FDI Clears Final Hurdle",WWD,vol. 204, no. 119, pp. 6.