Foreign direct investments are included in the capital account of a country’s balance of payments. This account records capital inflows and outflows related to investments in physical assets such as factories, infrastructure, and real estate by foreign entities.
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Foreign direct investments (FDI) are an integral part of a country’s economic landscape, playing a significant role in fostering economic growth, creating employment opportunities, and facilitating the transfer of technology and skills. These investments are included in the capital account of a country’s balance of payments, providing valuable insights into the flow of capital across national borders.
Investing in foreign countries allows businesses to establish a long-term presence and gain a stake in the local economy. The capital account records FDI, which comprises investments in physical assets such as factories, infrastructure, and real estate by foreign entities. This category of investment reflects the flow of funds for setting up or expanding production facilities, acquiring existing businesses, and undertaking substantial real estate development projects.
As renowned economist John Maynard Keynes once said, “The importance of money flows cannot be overestimated.” Indeed, the flow of capital in the form of foreign direct investments has numerous implications and benefits for both host countries and investing entities. Let’s delve into some interesting facts about foreign direct investments:
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Increase in FDI: Over the years, the global volume of foreign direct investments has substantially increased. According to UNCTAD, the global FDI flows reached $1.54 trillion in 2020, a decline of around 35% compared to the previous year due to the COVID-19 pandemic.
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Major recipients of FDI: Countries such as the United States, China, United Kingdom, Germany, and India are among the top recipients of FDI. These countries attract significant investment due to their stable economic conditions, market potential, and favorable investment policies.
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Outward FDI: Beyond being a recipient, many countries also engage in outward FDI, where domestic companies invest in foreign markets. Outward FDI allows companies to expand their market reach, gain access to resources, and mitigate risk through diversification.
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Types of FDI: Foreign direct investments can be classified into greenfield investments and mergers/acquisitions. Greenfield investments involve establishing new operations in a foreign country, while mergers/acquisitions entail acquiring or merging with existing businesses.
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FDI and employment: FDI plays a vital role in job creation, both directly and indirectly. When foreign companies invest in a host country, they often create employment opportunities in various sectors, thereby boosting the local economy and reducing unemployment rates.
To enhance the clarity of information, here is a simplified table showcasing the FDI inflows and outflows for a hypothetical country:
| Year | FDI Inflows (USD billion) | FDI Outflows (USD billion) |
|---|---|---|
| 2018 | 150 | 100 |
| 2019 | 200 | 180 |
| 2020 | 120 | 140 |
In conclusion, foreign direct investments are a crucial component of a country’s capital account in its balance of payments. The table and facts provided help shed light on the significance of FDI in driving economic growth, promoting international trade, and fostering cooperation between nations. As Albert Einstein once said, “The only source of knowledge is experience,” and analyzing FDI data enables us to gain insights into the economic dynamics and relationships that shape our globalized world.
Video response
In this video, the concept of foreign direct investment (FDI) is explained as a long-term investment by an investor in an enterprise in another country, resulting in lasting interest and significant influence. FDI can occur through mergers, acquisitions, or setting up business operations and is measured by equity capital, retained earnings, and net inter-company loans. The flow of loans between the investor and the enterprise determines whether FDI is positive or negative. FDI brings benefits to the host economy, such as job creation and knowledge transfer, while investors benefit through expanding distribution networks and accessing new technologies. In Singapore, inward FDI has played a crucial role in economic growth and expansion.
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Capital account
Foreign direct investments get recorded in a capital account, including equity investments in foreign stock.