Motivation of firms for foreign direct investments - a critical review Dissertation

Motivation of firms for foreign direct investments - a critical review - Dissertation Example The 1990s had witnessed a dramatic growth in the foreign direct investments to the developing countries. In the late 1980s, the net direct investment flows to the countries amounted from the 0.5 percent of their overall GDP to more than 2.5 percent in the year 2000-2001. The dramatic growth in FDI was particularly experienced in Latin America (Calderon, Loayza & Serven, â€Å"Introduction†). After 1994, with the steep decline in other private external flows, the significance of foreign direct investment has increased as the significant source of external financing to the developing world. Over the last few decades, the outsourcing from the foreign countries has become a significant strategic issue. This has been in the wake of increasing recognition of the benefits, provided by the effective outsourcing and international product strategies. In the quest for greater efficiency and cost savings, a number of companies have decided to source parts and components at a reduced cost from the suppliers across the globe. Hence, the importance of FDI has increased with the passing days. This report is an effort to look into the foreign direct investment from both the perspectives of domestic and foreign countries. There can be several benefits which can lead a host country to welcome the foreign direct investments while there are number motivations behind such decisions of the investing firms. All these have been discussed to have a more detailed look at the foreign direct investments taking reference from several articles and books, as well as the online resources. At the end, a conclusion has been inferred from the discussion carried out in different segments. Foreign Direct Investment Foreign Direct Investment is a form of investment which earns interest in the enterprises, functioning outside of the domestic territory of the investors. The foreign direct investment requires a business relationship between the parent company and its subsidiaries (EconomyWatch, â€Å"Types of Foreign Direct Investment: An Overview†). The term ‘Foreign Direct Investment’ can be defined in several ways. â€Å"Foreign Direct Investment (FDI) is the process whereby residents of one country (the source country) acquire ownership of assets for the purpose of controlling the production, distribution and other activities of a firm in another country (the host country)† (Moosa, p.1). According to International Monetary Fund’s Balance of Payments Manual, foreign direct investment is made to acquire an interest in any organisation, operating in a foreign economy; in this case, the investor aims to have to an effective voice in the organisation management. Back in the year 1999, the United Nations World Investment Report has defined FDI as an investment which involves a long term relationship and reflects a long-term interest and control of an entity in an organisation, in any foreign country. While compared to various forms of intern ational investment, the distinctive feature of FDI is that it enables the investor to have control over management policy and decisions of the organisation in the foreign country. A number of researchers have argued that the element of control has provided