One primary benefit of global business is that money flows from one country and is invested in companies in other countries. Chief among these flows is foreign direct investment, or FDI. In this video, we'll talk about FDIs and why they are so important to both developing and developed economies. So, what is a foreign direct investment?
Like it sounds, an FDI is an investment a firm or an individual makes into business interests located in a country outside of their own. FDIs could include a new factory in a foreign country, like Tesla's factory in China, a purchase of an existing company, like Walmart's purchase of the retail chain Cifra in Mexico, or an investment into companies in foreign markets, like China Investment Corporation's $5 billion investment for nearly a 10% share of Morgan Stanley. An FDI consists of both an inflow and an outflow. For example, When Toyota builds a manufacturing plant in South Carolina, it is both an inflow into the U.S. and an outflow from Japan. FDI is essential for the economic health of developed nations.
These investments support innovation, job creation, and economic development. A look at global FDI reveals that the vast majority of inflow, around $350 billion, comes into the U.S. each year. China receives around $150 billion, India $50 billion, and the UK around $20 billion.
The inflows to the People's Democratic Republic of Congo, Tanzania, and Kenya are each at about $1 billion annually. FDI outflows often mirror inflows. The outflow from the US averages about $200 billion, China $100 billion, and Canada $75 billion. Kenya reports about $200 million in outflows, and Congo around $125 million.
Now, You're probably wondering why on earth I just made you sit through all of those numbers. Here's your answer. The net flow of FDI is basically the inflow minus the outflow.
A positive net flow means that companies in country A invest more money abroad than foreign investors invest in country A. A negative net flow means that companies in country A invest less abroad than foreign investors invest in country A. This chart shows that most countries have a negative net inflow.
China has a negative $60 billion net inflow, and the US has a negative $160 billion net inflow. Again, this means that countries invest more in companies in China and the US than China and the US invest in companies in other countries. Japan, Germany, Canada, and Saudi Arabia are all examples of the few countries with positive net flow, meaning they invest more in other countries'economies than other countries invest in their economies. FDI inflows indicate a healthy economy. To potential investors, they basically say, look how many firms are invested in companies in this country.
This country must house several healthy assets. You should invest here. Because of this, FDI is often used to measure growth and development, particularly in emerging markets.
Emerging economies vie for foreign investments because that money helps build critical infrastructure such as roads, hospitals, schools, and factories, and they help to improve worker skills. For example, Botswana has received foreign investment from De Beers to develop its diamond business. This joint venture has had a dramatic impact on the entire country. According to Bloomberg, Botswana was one of the world's poorest nations when it gained independence from Britain in 1966, with an annual per capita gross domestic product of $70 and only 12 kilometers of paved roads. Today, Botswana's road system has grown to over 7,000 kilometers and its annual per capita GDP is over $8,000.
That's higher than its more developed neighbor, South Africa. While these gains are impressive, the government wants to further boost employment in the diamond sector through a new deal with De Beers. What we really need is to see jobs coming through.
We want to see young people participating in these jobs, said a Botswanan official. This is only likely to happen through more FDI. Foreign investments grow developing economies.
The partnership between Botswana and De Beers is only one of the many examples of the positive impact of FDI inflows. And the dramatic impact these inflows have on developing infrastructure and job growth is undeniable. On the other hand, some leaders see FDI as potentially problematic as foreigners buy up important assets in one country and take the profits back to their home country.
Several industry experts fear that the US is selling off our ability to produce wealth. What do they mean? Well, Foreign corporations own many prominent U.S. companies such as B.F. Goodrich, RCA, Carnation, Gerber, Starwood Hotels, and General Electric Suppliants Business, to name just a few.
Foreign ownership removes control from the U.S. and gives it to a foreign company, a company whose interests may not be in the best interests of the U.S. As a result, some argue that FDI into the U.S. must be carefully regulated. Michael Stumo summed up these issues neatly when he said, We must ensure that foreign greenfield investments in the U.S. and acquisitions of existing U.S. companies provide a clear, net benefit to the U.S., with special scrutiny in cases of state-influenced foreign entities.
The Committee on Foreign Investment in the United States, or CFIUS, has the power to regulate, approve, and deny any purchases, but the committee rarely blocks any FDI deals. Similarly, Many other countries have similar organizations that oversee and approve FDI investment. Let's wrap up.
We've learned that FDI creates international economic integration by creating stable and long-lasting links between economies and countries. It's also an important channel for technology transfer between countries, such as when Toyota built production plants in the U.S. and taught suppliers how to produce better quality auto parts. In addition, FDI promotes international trade through access to foreign markets, and can be an important vehicle for economic development. FDI can be even more significant for developing economies and emerging markets when companies need funding and expertise to expand international sales.
These private investments in infrastructure, energy, and knowledge are critical economic drivers that help increase jobs and raise wages. Though some worry about national security, both critics and supporters agree that FDI has done well. can provide significant benefits to economic development and work as a crucial catalyst for global economic growth.