Sample Economics Essay Summary on Foreign Direct Investment

Foreign Direct Investment

In the essay, Foreign Direct Investment (FDI) is compared to other international business forms such as franchising, exporting, licensing, contract arrangements and turnkey operations. FDI is defined as the acquisition of a long lasting interest in the management of a company that operates in a country outside that in which the investor is a citizen. FDI may involve management exportation, capital, important material inputs and technology exportation. In exchange for these exports, the investors gain in terms of license fees, profits and transfer payments. The key benefits associated with FDI are business control with possibility of avoiding tax and profits. It is however costly in terms of capital requirement and operational commitment (Harris et al., 2012).

Exporting on the other hand deals with physical products. This requires no investment overseas. At the same time, only foreign documentation and marketing can be expected to be changes to domestic operations. Its key limitations include vulnerability to trade barriers, inappropriateness for services and logistical problems. In licensing, technical information is sold as well as the rights to use and use assistance. Contrary to FDI, licensing needs less capital and time investment and can raise business returns in terms of technology and creativity. The limitations however include quality control and prevention from foreign market exploitation. Franchising involves selling of a trademark, some inputs and services in exchange for payments (Chen & Mujtaba, 2007). Additionally, the company can share in revenue. Turnkey operations involve design and equipment of foreign manufacturing companies. This results in advantages such as absence of contractor risk, foreign markets benefits especially where FDI is not allowed. Contract arrangements involve selling goods, financing or expertise and materials.



Chen, L.Y. & Mujtaba, B. (2007). The choice of entry mode strategies and decisions for international market expansion. Journal of American Academy of Business, 10(2), p.322.

Harris, S., Kuivalainen, O.,& Stoyanova, V. (2012). International business: New challenges, new forms, new perspectives. Houndmills, Basingstoke, Hampshire: Palgrave Macmillan.


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