Foreign direct investment (FDI) is vital for developing and emerging market countries as it promotes economic development and modernisation, income growth and employment. However, while there are many benefits to both investors and host countries, there are also a few disadvantages that need to be considered. Established in 2001, SG Hiscock is home to a team of award-winning boutique fund managers based in Melbourne. Read on to learn more about FDI, the pros and cons and why it is important.

What is Foreign Direct Investment?

FDI is a type of investment in a country’s productive assets by foreign investors, and occurs when an individual or business owns 10% or more of a foreign company. A 10% ownership doesn’t give the investor a controlling interest in the foreign company, however, it does allow influence over the company’s management, operations, and policies.

Why is it Important?

Foreign direct investment is critical for developing and emerging market countries. Many companies in these countries need multinational funding and expertise to expand their international sales and the countries themselves need private investment in infrastructure, energy and water to increase jobs and wages.

The Pros of FDI

There are many advantages to both the investor and the foreign host country.

For the Investor:

Investment Diversification – Individual investors have the potential to achieve greater portfolio efficiency as FDI diversifies their holdings outside of a specific country, industry, or political system.

Tax Incentives – Foreign investors receive tax incentives that are very beneficial.

For the Host Country:

Economic Stimulation – FDI can create a more conducive environment for companies and the investor to stimulate the local community and economy.

Easy International Trade – Most countries have their own import tariffs, which can make trading difficult. FDI makes international trade a lot easier.

Transfer of Resources – FDI allows for resource transfers and the exchange of knowledge, technologies, and skills.

Increased Productivity – The facilities and equipment provided by foreign investors can increase the productivity and efficiency of the target country’s workforce.

When all of the benefits of FDI are combined, the result can lead to overall improvements in the standard of living in the host country, as well as increasing its access to and competitiveness in world markets.

The Cons

From an economic perspective, capital inflow from foreign direct investment is often accompanied by higher, longer term outflows that do not benefit the host country.

Displacement of Local Businesses – The entry of large foreign firms may drive out local businesses that simply cannot compete.

Profit Repatriation – Many large foreign companies will not reinvest profits back into the host country leading to large capital outflows.

Possibility of Exploitative Practices – Investors may over-exploit human and other natural resources. For example, they may pay less labour, clear land to set up factories and dump hazardous waste into the environment.

In an increasingly globalized economy, opportunities for foreign direct investment are growing. Investing abroad may be very financially rewarding, but also consider that such investment carries some risk.

SG Hiscock fund managers specialise in high conviction, actively managed investment strategies and Managed Discretionary Portfolios. For the fund managers Melbourne investors trust, get in touch with us online today or by calling (03) 9612 4600.