Foreign Direct Investment Essay

FDI leading to fragmentation of the production process over the world has almost completely changed the form or problem of international trade the world facing since it started globalization. That is main reason why the result comes out about the replacement of the traditional inter-industry trade with intra-industry and intra-product trade. After studying which are determinants for foreign direct investment through theoretical literature, it can be assumed that either export or import of a foreign market establish production facilities in the country. By empirical study, it prove that trade and FDI are complementary to each other. In many study and research, it has predicted that there is a double way linkage between trade volume and FDI.

They are horizontal and vertical FDI. For horizontal FDI (two countries have similar endowments), Trade and investment behave as substitutes to each other as in such a case instead of exporting its products, the Multi- National Enterprise (MNE) would produce those products in the host country by setting up a production unit there. This would be very advantageous for that trade costs are higher than the costs of setting up a plant in the host country in the long run. For vertical FDI (two countries with different endowments) the production process is split between segments which are relatively intensive in different factors of

It can be true to a large extent, it is advantageous to the country generally as well as this cost minimizing behaviour of the firm would result in a higher degree of specialisation. Trade theory suggests that International Trade (which is always welfare improving) is a result of higher degree of specialization because this case occurs due to the increased FDI in the labour abundant country. Edward M. Graham say Foreign Direct Investment operates rather than displacing trade. FDI lets a firm to establish a larger area for distribution and not only produce a larger number of commodities but also increase the number of products sold in the foreign market.

It has a faster increasing merger and acquisition across the regions where the globe has given a boost to the flow of Foreign Direct Investment. The UNCTAD report estimates that FDI inflows reached at US $1.2 trillion in 2006. Most developed nations around the world had attracted a huge amount of FDI in 2006. The flows of FDI to developing countries were significant in the year 2006. FDI inflows to the developed countries gained about 48 percent over the previous year. A major concern of FDI among developed countries (horizontal FDI) is attraction the market of the country the foreign capital is invested. On the other way, the firms from developed countries