Foreign direct investment: definition and factors that stimulate them

Foreign direct investments are real investments in the company's own capital, land or fixed assets, which provide the investor with full or partial participation in management.

This type of investment was widely spread thanks to the development of transnational corporations, which, for a number of reasons, benefited from investing part of the funds in other enterprises, increasing profits and, as a rule, getting them into ownership (often such enterprises are part of TNK as a subsidiary). In some cases, direct investment is also a political lever of influence.

Direct investments are any investments exceeding 10% of the property. A part of equity participation can be obtained in exchange for personnel, technology and other tangible and intangible benefits.

The most active foreign direct investment in comparison with the volume of world trade began to increase, starting from the 80s. The reason for this was the integration of production, the universal processes of globalization, the increased role of TNCs, the economic policies of developed countries, and the willingness of the third world countries to create conditions for attracting such investments in their economies.

Factors that stimulate foreign direct investment

Marketing factors are one of the most important. Growing TNCs need to expand the market to maintain and increase their sales. The limited size of the domestic market makes it necessary to geographically diversify production.

Trade restrictions - foreign direct investment allows TNCs to circumvent trade restrictions and operate smoothly abroad as local firms, which saves on import payments and customs clearance of cargo. This is also done to increase the loyalty of customers who prefer to buy goods from a domestic manufacturer.

Cost factors - very often direct investments and, as a result, the creation of an enterprise in the territory of another country allow to save on the most important types of costs - on raw materials and labor costs. This is what forces large companies to transfer their production to less developed countries, which allows several times to reduce the cost of production. In addition, this can increase the reliability of sources of raw materials. Another reason is often easier and cheaper to establish a new quality control system at the new enterprise and to import its technologies than to manage the trade flows from the parent company.

The investment climate in the invested country is also a very important factor. Some countries, for example, Canada, actively support their own producer and impose high import duties, which makes direct investments in the economy more profitable for foreign entrepreneurs than ordinary imports.

Another important factor is the perfection of the legal framework protecting the investor's rights from nationalization or discrimination, as well as the maximum economic and political stability in the country. Discrimination of foreign investors can be carried out in the form of a special type of taxation, price control, restrictions in the placement of orders, restrictions on the transfer of money, and the limitation of emigration of labor resources. The investment climate also loses if there is a high probability of currency risks in this country.

The evaluation of the country's attractiveness for foreign investments is made using a certain system of indicators, which includes more than 340 indicators and many expert assessments.

For today, the most attractive for foreign direct investment are the USA, Canada, Germany, Switzerland, the Pacific countries.