What is ‘foreign direct investment’?
Foreign direct investment (FDI) is when a company owns another company in a different country. FDI is different from when companies simply put their money into assets in another country—what economists call portfolio investment. With FDI, foreign companies are directly involved with day-to-day operations in the other country. This means they aren’t just bringing money with them, but also knowledge, skills and technology.
A lot of economists really like FDI, especially when it's flowing from rich countries into poorer countries. The idea is that when international companies come in, they can either shake up an existing industry, because they’re bringing competition for the domestic companies that already exist, or can create entirely new industries. FDI can also strengthen local economies by creating new jobs and boosting government tax revenues.
Over longer periods of time FDI can also have big positive spillover effect. Things like training workers or building physical infrastructure might only benefit the company at first, but as workers change jobs and new uses are found for the infrastructure, the rest of the economy can benefit as well.
FDI is also typically a long term commitment, so countries don’t have to worry as much about foreign companies coming or leaving overnight (the way they do with super short-term investments or “hot money”).
But anytime foreigners buy companies that control important parts of the economy, there are bound to be a few sticky issues. Security is one: letting foreign companies control key industries like telecommunications or transportation can potentially cause serious problems down the road.
People also worry about where the profits of a foreign owned company will go. The local economy might benefit from the initial foreign investment, but if the company sends all the profits to investors in another country for years on end, that could be a drag on the economy in the long run.
The politics of FDI are also sometimes messy. International corporations have a lot of power, and in a lot of cases they’ll only agree to invest in a country if they get big government bonuses, like tax breaks or free land. And once they’re set up, foreign companies can become a permanent force in local politics.
Still, international organizations like the International Monetary Fund and the World Bank are generally quite supportive of FDI, and most economists would probably say it does more good than harm. One estimate says that FDI is responsible for creating around 2 million new jobs a year in developing countries.¹ But as with so much in economics the details matter; there are plenty examples of FDI gone wrong. And even when it goes well there are bound to be both winners and losers.
