Foreign Direct Investment which is commonly known as FDI refers to the investment that is made to acquire long term interest in companies that are functioning outside the economy of the investor. The investment is called direct because basically the investor who could also be a foreign person, group or company looks to seek control, influence and manage the foreign enterprise. Investing through foreign direct investment includes re-investing profits that are earned from overseas function, intra-company loans, mergers, acquisition and creating new facilities. Foreign direct investment is a direct source of foreign finance for countries that are wealthier and have the capacity to invest in other countries that have limited or less amount of finance. As per the research of World Bank, FDI in small business growth plays a critical role in developing the private sector with lower income economies in reducing poverty levels. It is basically a cross border investment by an individual or a group with the idea of obtaining a lasting interest in the economy of another country. It is a lasting interest that implies the survival of a long term relationship between the direct investor with the company and a major degree of authority by the direct investor on the management of the enterprise (Stein, Ernesto, 2001).
Importance of FDI in Contemporary Business
Essentially, FDI is an important tool for driving contemporary and modern business today. It helps in generating long-term source of capital and helps to bring in new and advance technology with foreign support through direct investment. It gives an opportunity to modern day businesses to become more actively involved with internal community. In past 10 years, FDI has actually changed the whole situation of the economy where it has made new entrants to enter emerging market with more control. FDI is not only about money and revenue but it also accounts for 2/3 of its portion through the purchase or import of machinery, fixtures, building and equipment. In addition to this, large conglomerates and multinational companies make the overall devastating percentage of FDI. However, with the increasing use of internet and the increasing role of technology, FDI may well lose its worth and support in the market that means newer and non-traditional forms of investment will play extraordinary role for modern day businesses. The ever growing role of FDI in developing countries in the age of globalization is rarely disputed (Khrawish, 2011).
Threats of investing in Emerging Economies
Investing in emerging markets gives the opportunity to invest in new markets that are still at growth and have the maximum potential to generate revenue. IT gives the opportunity of better growth rates, higher expected returns and also gives diversification benefits. However, with all benefits of investing in emerging markets it has some risk associated with it which can be for residents and foreign investors.
Foreign Exchange Rate Risk:
Investing in an emerging economy means that the person or the company has to convert his local currency into domestic currency that is obviously not strong. For example, an American who purchases an Indian stock in India will have to sell and buy the security using Indian rupee consequently, currency fluctuations can actually have an impact on the total return of investment.
Inflation risk:
A risk associated with investing in an emerging market is that it brings a strong mix of insufficient monetary restraint and economic growth, which results in higher inflation, a problem that has actually come up in emerging markets. Run away inflation also devalues the currency, slows down economic growth and decreases corporate profits.
Institutional Risk:
With an emerging market or economy, the state does not have complete control over companies that invest capital in the economy therefore, chances of fraud and inadequate disclosure of material information increase drastically. As a result, investors have little or no control over standard regulations.
Liquidity Risk:
Another problem with investing in emerging economies is that it has much lighter trading volumes than a developed market; in addition it has smaller number of participants which brings in the risk factor as the investor might not find an appropriate buyer for shares at a decent price. Instable market creates a risk of wide price fluctuations in a short period of time (Yoshitomi, 1993).....................................
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