Foreign direct investment (FDI) is the after effect of globalization. From the 1990s onwards most of the developing countries have begun to carry out economic liberalization policies. That is, the governments of these countries started to remove stringent and prohibitive legislations that prevented foreign firms to start business in these countries. Many countries started free trade areas with neighboring countries. These policy changes removed political and geographical constraints for doing business. In effect, this led to a situation where a successful business organization in a particular country can operate in any country in the world, if it wants to. The simultaneous emergence of internet as a global medium during that period acted as a catalyst for the process of globalization.
Foreign direct investment theoretically provides a win-win situation for both the foreign organization and the host country. In most of the Investment climate developing nations, the cost of manufacturing in general will be substantially lower than that of developed countries because of the obvious difference in currency values and relatively lower wages. So, the established companies of developed countries can considerably reduce the price of their products by starting a manufacturing unit in developing nations. These companies have the technological expertise and procedural know-how of production, while the developing nations can provide low-cost infrastructure facilities and human resources.
But things are not rosy and simple as it sounds. Different countries have different rules regarding foreign direct investment. For example, the rules in India are vastly different to that of China, and both of which are dissimilar to that of Brazil. Only a few multinational companies start a business as their own in a foreign country. A major portion of FDI comes through subsidiary companies. What most companies do is to form a joint venture with a suitable company in the foreign country. Some countries put a limit on the percentage of shares the foreign company can have on the subsidiary company.
When planning for a foreign direct investment, an organization should consider several factors: the track record and performance details of the subsidiary company, the political and investment climate of the country where the investment is going to be made, and a thorough cost-benefit analysis of the whole project. A case study on the progress of a similar investment will always help in decision-making. One has to also check for the future scenario like imminent elections and likely policy changes in a country before proceeding to invest in that country.
The major areas of foreign direct investment are retail sector, infrastructure development like construction of roads, dams, bridges, and airport, oil exploration, and software development. Telecommunication sector and mass media business are also witnessing increasing FDI inflow. With globalization ready to expand its wings through technological advances, more and more business segments are likely to find themselves at the focus of heightened FDI interest.