There are various forms and levels foreign direct investment, which depends on the type of company you are running and on the reasons for investing. As a foreign direct investor, you would purchase a business in a target country by means of an acquisition or a merger, new venture, expansion, acquisition of shares in an associated business or participation in equity joint ventures across international boundaries. If you are planning to engage in a foreign direct investment, it is important to determine first its pros and cons.
List of Pros of Foreign Direct Investment
1. It allows for easy international trade.
Generally, a country has its own import tariff, which is why you should consider trading in another country is quite difficult. Aside from this, there are industries that would want to establish presence in the international markets to make sure their goals will be met completely. Now with foreign direct investment, all these things will be made easier.
2. It paves the way for economic development stimulation.
This type of investment can stimulate development in the target country, which creates a more conducive environment for you as investor and provides benefits for the local industry.
3. It promotes the development of human capital resources.
This is one huge advantage brought about by this type of investment, which is often understated because it would not be apparent right away. As you should know, human capital is the knowledge and competence of those who are able to perform labor, basically known as the workforce. The attributes gained by sharing experiences and training would boost education and overall human capital of a country, constituting a pool of resources that are not tangible, but instead something that is on loan. All these things considered, a country with foreign direct investments can greatly benefit from improving its human resources while it maintains ownership.
4. It offers an economic and employment boost.
This form of foreign investment can create new job opportunities in the target country, as investors start new businesses, which in turn leads to an increase in income, more buying power among the people and eventually economic boost.
5. It allows for transfer of resources.
A foreign direct investment would allow transfer of resources and exchange of knowledge, where different countries are provided access to new skills and technologies.
6. It leads to increase in income.
Of course, investing in another country would increase its income, with more job opportunities and higher wages. As a result, economic growth is spurred. Keep in mind that larger companies would usually offer higher salary levels than those normally operating in the target country, which means that there will surely be an increase in income.
7. It provides tax incentives.
Generally, parent companies would provide foreign direct investment to receive additional expertise, products and technology, and as a foreign investor, you would receive tax incentives that would greatly help in your field of business.
8. It ensures an increase in productivity.
As you can see, the pieces of equipment and facilities you provide as a foreign direct investor would increase productivity in your target country.
9. It reduces disparity between costs and revenues.
Typically, this type of investment can lower levels of disparity between costs and revenues, which will enable the target country to keep production costs at the same level and make sure goods will be sold easily.
List of Cons of Foreign Direct Investment
1. It carries the risk from changes in politics.
Considering that politics can change instantly in a certain country, foreign direct investments can also be very risky. In addition, most of the risk factors that come with it are extremely high, and you will definitely feel their effects.
2. It hinders domestic investment.
As this type of investment focuses its resources elsewhere other than your home country, it would sometimes hinder domestic investment.
3. It comes with higher costs.
Basically, if you invest in another country, you would notice that it will be more costly than when you export your products. This means that you should have sufficient funds to set up your foreign operations.
4. It brings about a negative influence on exchange rates.
A foreign direct investment can occasionally affect exchange rates to the detriment of one country and to the advantage of another.
5. It encourages expropriation.
Put in mind that political changes can lead to expropriation, which is a situation where the government in a foreign country will have control over your assets and property.
6. It imposes economic non-viability.
Considering that this type of investment may be capital-intensive from your point of view as investor, it can be very risky and economically non-viable.
7. It represents modern-day economic colonialism.
As for many 3rd-world countries or at least those having some history of colonialism, they would worry that this way of investing could result in some form of modern-day economic colonialism. This would expose a host country and leave it vulnerable to exploitations by foreign companies.
8. It has a negative impact on the country’s investment.
Foreign exchange rate and direct investment policies might have a negative impact on the investing country. As you can see, investments may be banned in some foreign markets, so it would be impossible for you to pursue an inviting opportunity.
Investing in the economy of a foreign country, buying into an international company foreign company or expanding business overseas can be extremely rewarding, providing you with the boost you need to jump to a higher level of success. However, these things also carry risks, which mean that it is highly important for you to assess the economic climate carefully before you embark in such ventures.
Aside from this, it is also important to hire an expert who is accustomed to working internationally when it comes to finance, as he can provide you with a clear view of the existing economic landscape of your target country, helping you predict future growth and monitor market stability. Remember that we are living in an increasingly globalized economy, which means that foreign direct investments will become a more accessible option for business. And by weighing down the pros and cons of this venture, you will know firsthand if it is the best road for you to take to achieve success.