Analysis of advantages and disadvantages of FDI

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With the development of economic globalization, foreign direct investment (FDI) is increasingly being recognized as an important factor in the economic development of countries. Although FDI began centuries ago, the biggest growth has occurred in recent years. This growth resulted from several factors, particularly the more receptive attitude of governments to investment inflows, the process of privatization, and the growing interdependence of the world economy.

Foreign direct investment (FDI) occurs when a firm invests directly in facilities to produce and/or market a product in a foreign country (charles w.l.hill, "International business"). FDI takes on two main forms; the first is a green-field investment, which involves the establishment of a wholly new operation in a foreign country. The second involves acquiring or merging with an existing firm in the foreign country. On the other hand, FDI is divided into two kinds; horizontal FDI (market-expansion investments) which is investment in the same industry abroad as a firm operates in at home; And vertical FDI (resource-seeking investments), which comprises two forms further; the first is backward vertical FDI investing an industry abroad that provides inputs for a firm's domestic production process.

The second is forward vertical FDI in which an industry abroad sells the foods of a firm's domestic production processes.

Analysis of advantages and disadvantages of FDI

In addition to FDI, the firms are also able to expand foreign market by means of exporting and licensing.

Compared with exporting and licensing, the advantages of FDI for companies

1. Low transportation cost. As far as the firms which mainly adopt horizontal FDI are concerned, transportation cost must normally be considered to production costs. When the firm produces a low value-to-weight ratio production such as margarine newspaper and the like, relative to exporting, FDI would only need a...