Foreign Direct Investment Essay ⋆ Political Science Essay Examples ⋆ EssayEmpire

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Foreign direct investment (FDI) is an investment made by a multinational corporation in a country other than its home country. For a company to be considered a multinational corporation, it must possess at least one FDI project in which it maintains management rights or control. There are two main forms of FDI: Greenfield investment and mergers and acquisitions. Greenfield investment is the name given to the construction of new facilities, usually geared toward production, in foreign countries. This is a familiar form of FDI wherein an international business builds factories in foreign countries for manufacturing uses, such as Nike’s opening a factory in the Philippines. However, mergers and acquisitions is the most common form of FDI. This occurs when a company is able to gain control of the managerial aspects of a foreign company, usually through the purchasing of stocks.

Historically, it was during the era of British hegemony in the nineteenth century that FDI started to become a norm. The use of the British East India Company to govern India is a classic example of the beginnings of FDI—the British Crown left the development of the Indian colony up to a new multinational corporation. However, it was not until after World War II (1939–1945) that investment in countries by foreign companies exploded. Immediately after the war, the leading recipients of FDI were developed countries, including the United States and the United Kingdom. This occurrence happened because of the international economic environment in the 1940s and 1950s. The Bretton Woods organizations were pushing for a much larger and internationally inclusive global economy that could be achieved through international investments, and European and American companies were investing in each other’s countries at a very high rate during this time. The United States was devoted to the rebuilding of western Europe through the Marshall Plan, which was reciprocated in later years by investment in the United States itself.

FDI has been promoted as the road to development for many less-developed countries. For instance, the United Nations (2000) claims that “FDI has the potential to generate employment, raise productivity, transfer skill and technology, [and] enhance exports.” Investment is supposed to create growth; however, this is done at the expense of domestic policy because less-developed countries are supposed to exude an air of political and financial stability, usually through privatization and liberalization. Also, multinational corporations pressure local governments to deregulate health and safety standards, keep minimum wages low, and not constrain the use of child labor. Many less-developed countries see the use of FDI as a means of neocolonialism; instead of foreign governments controlling policies, multinational corporations take their place. Underdeveloped countries worry that multinational corporations will challenge local domestic authorities by demanding policies that will make the country more attractive to foreign investors. Also, smaller local businesses are threatened by the influx of bigger international corporations, and many of these companies fall victim to multinational corporations, hurting the local economy.

According to the 2004 Foreign Direct Investment Confidence Index compiled by A.T. Kearney, a global management consulting firm, corporate investors named China, the United States, India, the United Kingdom, Germany, France, Australia, Hong Kong, Italy, and Japan as the top ten countries that are nonrisk investments. These investors see Asia and Europe— especially in the eastern and central parts of the continent— as the areas with the highest growth potential in the coming years. Africa, on the other hand, is seen as one of the most risky investment areas because of corrupt governments and high crime rates. Multinational corporations are also less likely to invest in a country that is not just politically instable but also militarily unstable. Places like Africa, where there are a number of conflicts taking place, are not attractive to outside investors as there is no guarantee of the safety of their investments.

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End Poverty 2015 Millennium Campaign, www.endpoverty2015.org/goals/global-partnership.
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United Nations. United Nations Millennium Declaration, 2000, www.un.org/geninfo/ir/index.asp?id=180.
Whiteside, Alan. “Poverty and HIV/AIDS in Africa.” Third World Quarterly 23, no. 2 (2002): 313–332.