Anfernee Yu Jeco

FIN-023 BAFM41S1

Assignment 3.1 Direct Investments

Write three (3) paragraphs and discuss, Foreign Direct Investments (FDI) and justify do
the free flow of FDI without restriction at all will benefit a Country?

Foreign direct investment (FDI) is an investment or purchase made by a party in one

country into a business or corporation in another country with the objective of
establishing/obtaining a lasting interest. The lasting interest on a FDI implies the existence of a
long-term relationship between the direct investor, the enterprise, and a significant degree of
influence by the direct investor on the management of the direct investment enterprise. Direct
investment involves both the initial transaction between the two entities and all subsequent
transactions between them and among the affiliated incorporated and unincorporated
enterprises. In general, FDI is not used to describe a stock investment in a foreign company but
instead it used to describe a business decision in acquiring a substantial stake in a foreign
business or to buy it outright in order to expand its operations to a new region.

Foreign direct investment is critical for developing and emerging market countries. Their
companies need multinational funding and expertise to expand their international sales. Their
countries need private investment in infrastructure, energy, and water to increase jobs and
wages. Economists tend to favor the free flow of capital across national borders because it
allows capital to seek out the highest rate of return. FDI without restriction may also offer
benefits to a country according to Fedstein (2000). The first benefit is that the international
flows of capital can reduce the risk faced by owners of capital by allowing them to diversify
their lending and investment portfolios. Second, the global integration of markets can help in
spreading the best practices in corporate governance, accounting rules, and legal traditions.
Third, the global mobility of capital limits the governments to impose bad policies. In addition,
the gains to host countries from FDI can take several forms that allows the transfer of
technology, recipients of FDI often gain employee training in the course of operating the new
businesses, and profits generated by FDI contribute to corporate tax revenues in the host
country. In contrast, FDI also has disadvantages in which it is not suitable for strategically
important industries that could lower the comparative advantage of the nation according to an
IMF report. Second, investors have less moral attachment that might strip the value of a
business and that could sell unprofitable portions of the company locally. Last but not the least,
FDI has an unethical access to local markets in which they can use the company's collateral to
get low-cost, local loans. Instead of reinvesting it, they lend the funds back to the parent
company.

In conclusion, a foreign direct investment happens when a corporation or individual

invests and owns a foreign company. Many developing countries need FDI to facilitate
economic growth or repair. FDI has benefited countries through diversification of portfolios,
global integrations of markets, and provides technology transfers and financing to a country.
But FDI can become a disadvantage when comparative advantage is lowered by foreign
investment in strategic industries and It strips or adds no value to businesses. In an increasingly
globalized economy, the opportunities for foreign direct investment are growing. Investing
abroad may be very financially rewarding, but also consider that such investment carries
weighty risks.

“I affirm that I have not given or received any unauthorized help on this assignment and
that this work is my own.”