FDI is formed when a company wants to control ownership of another organization, individual, sector, or entity in another country. It has been enabled by globalization which eliminates business restrictions between countries and improves the flow of capital through the improvement of foreign investments. Hill and Hult (2018) note that globalization enables businesses to acquire their products and services from all areas globally and exploits costs and quality of the production factors in the targeted countries. FDI occurs when investors develop foreign business functions or gain access to international assets like monitoring assets or initiating ownership. One of the handful benefits of FDI includes stimulating economic development. FDI stimulates the economy of the targeted company and develops a favorable business environment for other organizations, investors and promoting the local economy and community (Hult & Hill, 2018)). Besides, it increases the demands of the currency in the targeted country, raising its exchange rate. Consequently, an increase in the currency rate improves the trade and export to import ratio on prices.
Another benefit of FDI is that it helps in creating employment in the foreign country. It creates new jobs since the investors create new opportunities in the targeted country. Besid es, FDI increases the income and purchasing power of the local community, which in turn boosts the targeted economy (Hill & Hult, 2018). For example, MacDonald’s opening new restaurants in China would help create opportunities for the locals and boost the country's economy. Additionally, FDI help in improving technology for businesses in third-world countries. Recipient companies acquire the best technologies to perform and manage their business operations and obtain legal guidance. Also, they can operate on the latest technology and improve their employees’ lifestyles. For example, Virgin Group establishing new plants in developing countries like India would help initiate the latest technology for designing clothes and manufacturing processes. Moreover, FDI enables developing countries to have continuous flow in their exchange rates (Hunt & Hill, 2018). As a result, it allows nations’ central banks to maintain their foreign exchange and stabilize their exchange rates. For example, FDI has enabled India to increase its inflow to 81.72 billion dollars, a 10% growth in the 2020-2021 fiscal year (Invest India, 2021) . Therefore , it is evident that FDI is a vital source of external capital to developing nations.
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References
Hill, C. W., & Hult, G. T. (2018). Global Business Today. New York: McGraw Hill Education.
Invest India. (2021, May 28). The investment climate in India has improved considerably since the opening up of the economy in 1991. https://www.investindia.gov.in/team-india-blogs/foreign-direct-investments-top-50-countries-india-2015-21
