What are the Benefits of Making a Direct Foreign Investment?

Justin Riche
Justin Riche
Businessman with a briefcase
Businessman with a briefcase

When investors from one country employ their resources in a foreign country, many benefits can be gained. Incentives such as speedy approvals for foreign investments, tax concessions, a liberalized operating environment, grants and subsidized loans will benefit the foreign investors. The host country can also benefit from this direct foreign investment, which can spur economic growth, job creation, improved living standards and so forth. Therefore, from the viewpoints of both the foreign investor and the host country, mutually beneficial arrangements are achieved.

Governments devise policies that attract direct foreign investments, which can aid the implementation of their national development strategies. For example, certain countries will lower the foreign investors' tax dues or even remove them entirely in exchange for increased economic activity. Experts who are versed in tax matters know many ways to legally circumvent or minimize taxes by using this direct foreign investment vehicle. Thus, foreign investors will consult with experts in order to find ways to take advantage of these policies, which is especially crucial when repatriation of foreign derived profits is subject to the jurisdiction of the home country of the investors and/or the host country. In some cases, full repatriation of these funds is allowed with minimum cost.

Both developed and developing countries lure foreign investors to their shores in various manners. For example, the United States government has plenty of tax incentives in place to attract foreign capital. Therefore, investors, irrespective of their location, will have many prospective direct foreign investment options they can use for their own goals. In some countries, foreign investors can get loans at low and favorable interest rates, which can be very attractive.

With this type of venture, foreign investors can buy entire businesses, manufacturing factories and more at bargain-basement prices, depending on the country. They can gain access to relatively cost-effective labor that can help their global business become more competitive. A direct foreign investment in developing countries can go a long way, because their economies have ample room for growth. This means that investors' capital can grow significantly, because these markets can grow quickly. Ultimately, these foreign direct investment endeavors can substantially improve the investors' profit margins.

From the point of view of the host country, advantages of foreign direct investment include new skills and means to level the playing field and lower the entry barrier into new markets. This can be pivotal for the country to improve its overall economy. A direct foreign investment can allow the host country to access efficient technologies that will increase production, which can translate into export competitiveness, then into more revenue, higher employment rates, better living conditions and so on.

One has to bear in mind that a country's risk assessment has to be conducted before making a direct foreign investment. For example, the political stability of the foreign country is an important matter. In most cases then, one can rule out a country whose political environment is precarious, because it likely would not make an ideal place for a foreign investment.

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      Businessman with a briefcase