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Understanding Foreign Direct Investment (FDI)
FDI or Foreign Direct Investment plays a big role in global business and economy. It is the main source of cheaper production facilities, market, access to latest technology, skills and finances required for success in business. The FDI ensures best practices like commitment and compliance with business policies.
Therefore, to ensure compliance with standards and regulations, the FDI provides business firms with capital, technology and management skills.
Classic Definition
For the purpose of ensuring best practices, Foreign Direct Investment can be defined as a firm that makes an investment to establish its factory, in a foreign country. The investments made in the building, its machinery, equipment and other assets make the portfolio of investment. There are other definitions of FDI as well.
However, owing to the recent developments in business best practices globally, the definition can be broadened. Now acquisition of the previous investment in the firm within the home country or abroad is also included in FDI. Therefore, direct acquisition could also refer to construction of a facility or an investment made through a joint business partnership. FDI also promotes compliance with risk management guidelines for international businesses.
These developments have led to decline in cost of global communication and have made it easier to manage foreign investment. This has consequently led to a surge in international trade, with new business policies for international investors.
FDI and Small or Medium Businesses
The FDI serves as an opportunity for small and medium businesses to get international business with best practices. This is because it is obvious that 2/3rd of foreign investment involves machinery, building, equipment and fixtures. At the same time, larger firms invest a great deal of money in the FDI. This means there is a great extent of risk management involved, offering small and medium businesses security.
With the coming of internet and ease of access to social media, traditional forms of business investments have faded away. Now direct investments into markets and decreased cost of communication have supported nontraditional means of investments. However, it has increased pressure on improvements in risk management. This development is bound to have an impact on global economy in the long run.
Perhaps this is why most governments in both developed and industrialized countries have stated focusing on FDI. This is because it ensures a flow of investment into and out of their economy. This has a positive influence on their economic status.
Some Best Practices Supported By FDI
- Licensing and Technology Transfer
- Reciprocal Distribution Contract
- Hybrid Strategies and Joint Venture
- Portfolio Investment
Importance of FDI
It ensures compliance with best practices to accomplish the following tasks:
- Avoid pressure by foreign government to boost local production
- Circumvents trade limitations
- Improves capability to increase production along with risk management
- Serves more opportunities for joint ventures and co-production
- Facilitates relocating domestic exports to local bases
Therefore, using FDI is one of the high end best practices recommended for small and medium businesses seeking at business opportunities.
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