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Multinational Business: Foreign Direct Investment - Essay Example

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Multinational Business: Foreign Direct Investment

Developing and developed countries are currently competing heavily to attract foreign direct investments. Communist countries like China and Cuba were not much interested in allowing foreign companies to invest in their soil earlier. At present China is the number one exploiter of globalization and foreign direct investments. It is difficult for a country to develop properly with the help of internal resources alone. In order to mobilize the internal resources properly, foreign direct investments in the form of capital, technology and equipment are extremely important for a country. Even though a developing country may have many other sources of external finance, FDI seems to be the largest among all those sources. Even though foreign direct investments bring both tangible and intangible advantages to a country, it may develop some negative consequences also in a country’s economy and culture. According to Malik et al.( 2012), “FDI is not only considered as a healthy sign for the overall national economy but also a positive indication for the local industry considering its positive spill over effects” (Malik et al., 2012, p.230). In order to attract more FDI, a country should sign trade agreements such as GATT (General Agreement on Tariffs and Trade) and WTO (World Trade Organization). These two trade agreements have many benefits as well as drawbacks as far as the interests of a developing country are concerned. This paper analyses the definition of FDI and the positive and negative effects of FDI on a country’s economy. Definition of Foreign Direct Investment (FDI) According to Dicken (2007), “Direct investment is an investment by one firm in another firm with the intention of gaining a degree of control over that firm’s operations. Foreign direct investment is simply direct investments across national boundaries” (Dicken, 2007, p.36). In other words, foreign direct investment is a type of investment in which an enterprise transfers its capital to a foreign country for business purposes. To be more precise, foreign direct investment is the investment of foreign capital in domestic goods and services. Nestle, Starbucks, Vodafone, Exon Mobil, McDonalds, General Motors, Sony, Unilever, IBM, General Electric, Wal-Mat, IKEA, etc are some of the organizations which engage in investments in foreign countries as part of their business expansion. These companies are almost saturated in their domestic markets and it is necessary for them to find enough spaces in overseas countries for their expansion. For example, Starbucks has coffee shops, virtually in every corner of America. It is impossible for them to expand their business further in America. Under these circumstances, they will be forced to invest in overseas markets. Globalization provides them favourable climates for investments in overseas countries. Ietto-Giles (2002) mentioned that “The flow of FDI and portfolio investments across countries generates a very large amount of investment incomes going in the opposite direction” (Ietto-Giles, 2002, p.27). FDI investment incomes and normal investment incomes are traveling in opposite directions. While normal investment income circulates internally or domestically, some parts of FDI may flow out of a country. In other words, FDI has the ability to affect a country’s economy both positively and negatively. Positive effects FDI can have on host country economy Adina (2011) pointed out that “FDI have a training effect both in the national and global economy, providing the replacement and modernization of techniques and technologies, increasing production and supply of goods, ...Show more
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Summary

Globalization refers to the integration of world economies through the reduction of barriers to the movement of trade, capital, technology, and people. International business or cross cultural business has been increased a lot in recent times as a result of globalization, liberalization and privatization policies implemented in many countries. …
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