Sunday, June 7, 2009

Foreign Direct Investment: The Most Important Phrase You Don’t Know

Foreign Direct Investment (FDI) is the reason you can (or use to) be able to buy a shirt at Steve and Barry’s for $4.99. FDI makes electronics (iPods, TVs, computers, ect.) affordable for more people. FDI is responsible for half of modern globalization (the other half is the vast improvements seen in communications technology). FDI started the Chinese economy in the 1970’s, oil exportation from Venezuela (as well as the Middle East early on), and Subaru factories in America.

FDI is the fancy abbreviation describing how corporations build production facilities outside their home countries. Exxon building an oil pump in Saudi Arabia, Nike building a shoe factory in China, and Old Navy building a shirt factory overseas so people can dress like this here in America. Local people work at the facility which generates revenue for both the workers (through wages), the government (through taxing said revenue) and local stores (workers spending their money at local places of business). Meanwhile the company who invested in said facility reaps the profit produced, taking it back to their home country.

Unfortunately the results of FDI are not always so rosy.

We all know the story. Ford shuts down a factory in the US to build a new factory in Mexico. Ford is called greedy for abandoning the American worker, and leftists complain the Mexican workforce is being mistreated and underpaid. FDI of this variety is referred to as “outsourcing,” or sending jobs overseas. Outsourcing is by far the most controversial type of FDI for the home country. There has been a loud outcry over outsourcing in the US, especially in the current state of the economy.

The second type of FDI is much less controversial for the image of a corporation. It occurs when a company builds a production facility overseas that cannot be built in its home country. For example, most Americans don’t cry foul when Exxon builds a new oil pump in Saudi Arabia. The pump belongs to Exxon; the oil pumped from the ground belongs to Exxon, Exxon pays the workers (mostly locals), and gives the Saudi government an agreed figure.

Of course there are ‘problems’ with the second type of FDI as well. One issue is that it infuriates locals who feel like their government sold out to a foreign company. The second potential problem is nationalization, which is the fancy word for government taking control of an industry (with or without fair compensation). The final potential problem with this type of FDI is investing in areas with poor political stability. Investor companies tend not to invest heavily in such areas as the local government has a tough time guaranteeing the security of the asset.

Ok. Hopefully you found this bit as helpful as this sign, and as easy to understand as this situation. So, best of luck to you going forward in you quest to understand the current state of world economic affairs.

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