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What is Foreign Direct Investment?

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Definition

According to the International Monetary Fund, foreign direct investment, commonly known as FDI, "... refers to an investment made to acquire lasting or long-term interest in enterprises operating outside of the economy of the investor." The investment is direct because the investor, which could be a foreign person, company or group of entities, is seeking to control, manage, or have significant influence over the foreign enterprise.

Why Is FDI Important?

FDI is a major source of external finance which means that countries with limited amounts of capital can receive finance beyond national borders from wealthier countries. Exports and FDI have been the two key ingredients in China's rapid economic growth. According to the World Bank, FDI and small business growth are the two critical elements in developing the private sector in lower-income economies and reducing poverty.

The US and FDI

Because the US is the world's largest economy, it is a target for foreign investment AND a large investor. America's companies invest in companies and projects all over the world. Even though the US economy has been in recession, the US is still a relatively safe haven for investment. Enterprises from other countries invested $260.4 billion dollars in the US in 2008 according to the Department of Commerce. However, the US is not immune to global economic trends, FDI for the first quarter of 2009 was 42% lower than the same period in 2008.

US Policy and FDI

The US tends to be open to foreign investment from other countries. In the 1970s and 1980s, there were short-lived fears that the Japanese were buying America based on the strength of the Japanese economy and the purchase of American landmarks such as Rockefeller Center in New York City by Japanese companies. At the height of the spike in oil prices in 2007 and 2008, some wondered if Russia and the oil-rich nations of the Middle East would "buy America."

There are strategic sectors which the US Government does protect from foreign buyers. In 2006, DP World, a company based in Dubai, United Arab Emirates, bought the UK-based firm managing many of the major seaports in the United States. Once the sale went through, a company from an Arab state, albeit a modern state, would be responsible for port security in major American ports. The Bush Administration approved the sale. Senator Charles Schumer of New York led Congress to try to block the transfer because many in Congress felt that port security should not be in the hands of DP World. With a growing controversy, DP World ultimately sold their US port assets to AIG's Global Investment Group.

On the other side, the US Government encourages American companies to invest overseas and establish new markets to help create jobs back home in America. US investment is generally welcome because countries seek capital and new jobs. In rare circumstances, a country will reject a foreign investment for fears of economic imperialism or undue influence. Foreign investment becomes a more contentious issue when American jobs are outsourced to international locations. Outsourcing of jobs was an issue in the 2004 and 2008 Presidential Elections.

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