Foreign Direct Investments: A Key Factor for Business Globalization

Foreign Direct Investments: A Key Factor for Business Globalization

Darko Marjanović, Ivana S. Domazet
DOI: 10.4018/978-1-7998-4459-4.ch006
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Foreign direct investment is considered an effective way to enhance a country's comparative advantages. They are also a significant source of economic development, modernization, growth of production, exports, employment and income, and the main actors are multinational companies. Globalization of the market has increased the tendency for many companies to procure goods and services from different locations. The main goal of the paper is to present the structure and forms of FDI at the global level, as well as theories of FDI through the interconnectedness of multinational companies, their investments, and the economy of a country as an end user. The results of the research clearly indicate that it is in the interest of every country to attract as many FDI as possible, given that they are one of the success factors of the national economy in the global market. Therefore, the primary task of economic policy makers is to monitor world trends, harmonize domestic regulations and create an investment climate that will benefit foreign investors.
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Globalization represents the constitution and establishment of the guidelines of the single world market as well as the application of generally accepted principles for all participants, all with the aim of enabling the unhindered flow of capital and goods across national borders. The free movement of capital encourages the development of each national economy and thus increases their competitiveness. One of the main features of the process of globalization of the world economy is the internationalization of production, ie vertical and horizontal linking of economic entities from different countries. The faster movement and the volume of financial transactions are a consequence of the globalization of the world economy, which for most countries means a larger inflow of foreign capital, especially FDI. In the processes of globalization of the world economy, FDI has a significant role for economic growth and development of the national economy (Domazet, Marjanović, 2018), reducing the development gap of the national economy in relation to developed countries, as well as for faster inclusion in global economic flows. Globalization is considered a developmental force of modern society and is a reflection of concentration, centralization of capital and new forms of integration processes, with multinational companies considered as carriers.

FDI is a type of investment that aims to increase the efficiency of multinationals, as well as to support and encourage the development of a national community (Anken, Beasley, 2012). Neto and Veiga (2013) find that FDI is a consequence of modern processes taking place in the sphere of financial globalization, and at the same time they are the most important international source of financing. Therefore, foreign direct investment is a result of financial globalization, without which the significance of FDI would be imperceptible. Internationalization, as one of the outcomes of financial globalization, encompasses a number of interstate financial and economic processes. Internationalization creates the possibility that each entity can move from one market to another, looking for the best conditions for placement or fundraising. Through the development of international financial markets, the process of internationalization in the financial sector can be tracked, whereby the spillover of capital between individual markets is the result of the strength of multinational companies. Within the context of financial globalization, conglomeration is a very important process, especially through the expansion of multinational companies. This primarily refers to pooling (fusion or integration) of companies, or according to more recent terminology – mergers and acquisitions (M&A). If we look at it from a financial point of view, we can talk about merging financial institutions worth a billion dollars (megamergers), or even over several billion dollars (“super mega” mergers).

Foreign direct investment is a form of capital investment in which an investor acquires assets in another country with the intention of managing those assets. Therefore, these investments are directly related to multinational companies that aim to own and control production facilities that they establish outside their home (domicile) country. The volume and intensity of the distribution of foreign direct investments on a global level depends, above all, on the overall situation in the world economy.If a company opted for export, it would certainly have the lowest level of liabilities to the market in which it operates, with low risk, minimal control, but consequently lower profit potential. Since most companies are interested in making as much profit as possible, they decide to buy existing or establish completely new companies. Therefore, in addition to increasing profits, this way of entering the market, as a repercussion, brings more obligations and higher business risk for multinationals.

Key Terms in this Chapter

Globalization: The process of economic, social, cultural, and political activity that goes beyond the boundaries of nation-states, is reflected in the transfer of knowledge and information, increased volume of world trade of goods, capital and services.

International Movement of Capital: Transfer of financial resources between entities of different countries with delayed counter-transfer for a certain period of time, with the aim of achieving certain economic and political interests of the participants in this transfer.

Multinational Company: The parent company based in one country and that is composed of a large number of companies (affiliates) that are located in a number of countries.

Capital: Value (in the form of money, property, or human resources) which is invested in production or other economic activity with the main purpose to increase and yield the profit.

Greenfield Investment: Is a type of foreign direct investment (FDI) in which a parent company creates a subsidiary in a different country, building its operations from the ground up. In addition to the construction of new production facilities, these projects can also include the building of new distribution hubs, offices, and living quarters.

Mergers and Acquisitions (M&A): Is a term used to describe the consolidation of companies or assets through various types of financial transactions, including mergers, acquisitions, consolidations, tender offers, purchase of assets and management acquisitions.

Foreign Direct Investment (FDI): Capital investment by the company or individual with the aim of performing profitable activities on the territory of one state.

Investment Climate: Framework that enables foreign and domestic companies to operate and make profit in a given country.

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