Foreign direct investment (FDI) is the act of investing money into another country with the goal of creating “lasting interest.” When a company gains at least 10% of voting power in another company, it has acquired lasting interest. This means that the foreign corporation’s goal is to manage a long-term relationship with the host company by exerting control over its management or other ways. FDI is a major non-debt financing mechanism offered to countries for finance and technology transfer. Like China, FDI has supported many successful development stories and governments’ work to promote FDI to grow their local economy and draw new technology, business expertise, and capital to their nation.
Developing countries often face a shortage of investable surplus, which can come from domestic or foreign savings. To develop faster, it is crucial to seek foreign savings and foreign investment in various forms. FDI is a long-term investment that is a significant non-debt financial resource for a nation’s economic growth. It typically occurs in economies with the potential for growth and a trained labor force. FDI has dramatically grown as a significant method of transferring wealth internationally. Developing nations require FDI because it enables the transmission of technology that is not possible through financial investments or trade in products and services. The domestic input market can become more competitive with FDI, and according to Adam Smith’s concept of the invisible hand, FDI inflows drive economic growth.