Question:- Give a detailed account of the factors that induce firms to engage in foreign direct investment, distinguishing as appropriate between asset-oriented and market-oriented FDI. Provide examples to illustrate your answer

Definition of Foreign Direct Investment (FDI).

• FDI is the net transfer of funds to purchase and acquire physical capital, such as factories and machines, e.g. Nissan, a Japanese firm, building a car factory in the UK.
• In recent years, foreign direct investment has also widened to include the purchase of assets and shares which give investors a management interest in a firm.
• The World Bank defines foreign direct investment as:

“Foreign direct investment are the net inflows of investment to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor. It is the sum of equity capital, reinvestment of earnings, other long-term capital, and short-term capital as shown in the balance of payments. ” (World Bank)

• Foreign Direct Investment should be distinguished from portfolio transfers (e.g. moving financial capital to foreign bank accounts) this is known as indirect investment. (However, to complicate things, if there are portfolio transfers which leads to a foreign investor controlling a management share in the company, then this may be considered Foreign Direct Investment because of the transfer of ownership.)

FDI net inflows/outflows

FDI net inflows are the value of inward direct investment made by non-resident investors in the reporting economy. This is usually reported for a given year