Discuss the rise in importance of FDI for Multinational Enterprises Essay

Discuss the rise in importance of FDI for Multinational Enterprises - Essay Example This deepening and widening economic integration is achieved through three main channels such as trade, foreign direct investment and the international transfer of knowledge and technology. The enterprises, which have dispersed their business processes across the globe through the channel of FDI, are termed as Multinational Enterprises (MNEs). These MNEs are the main pillars in the globalized economies which involved in the world economic activities. Though trade which principally means export-import of goods and services across the geographical regions are there since many years but the concept of foreign direct investment (FDI) is rather of recent origin. Being different from portfolio investment this type of investment entails a firm to open its subsidiary in a foreign land to expand its business activities there. In today's fast moving global economy the scale of FDI made by a multinational enterprise plays a vital role for the growth of developed as well as developing countries across the world. In this essay the rise in FDI as well as its importance for the MNEs has been vividly described in the Section-II and also an analysis of the circumstances under which FDI may or may not be an appropriate strategy for an international business has been made in the Section-III. The conclusion to the discussion has been given in Section-IV. The analysis of the rising trend in the various regions of the world and the possible impact of FDI in the host and home economies has been made in this paper. II. FDI: The Increasing Trend in Global Economy "FDI is defined as a firm based in one country (the 'home country') owning 10 percent or more of the stock of a company located in a foreign country (the 'host country') -- this amount of stock is generally enough to give the home country firm significant control rights over the host country firm. Most FDI is in wholly-owned or nearly wholly-owned subsidiaries." (http://www.populareconomics.org/globalization/html%20/Glossary.html). Thus FDI is different from the portfolio investment which may cross borders but lacks such controls over it. This FDI may be 'Green-field'1 or 'Acquisition/Mergers'2 and also it may be 'horizontal'3 or 'vertical'4. "Thus to create, acquire or expand a foreign subsidiary, MNEs undertake FDI. The total direct capital owned by non-residents in a given country each year constitutes the stock of FDI" (Navaretti & Venables, 3). If one makes a comparison between export and FDI during the last twentieth century one can see that the exports grew much stronger than FDI in the pre 1980 period while the FDI sown an unprecedented rise after 1985. "The worldwide real GDP increased at a rate of 2.5% per year between 1985 and 1999 and worldwide exports by 5.6%, worldwide real inflows of FDI increased by 17.7%." (Navaretti & Venables 3). Also it is seen that the worldwide FDI stocks increased from $794 billion to $1, 768 billion in the second half of the eighties (Table-1). That means they more than doubled in just six years. The inflow of FDI peaked in the year 2000 but suddenly declined from the year 2001 due to slowing down of economy.