Foreign direct investment and business growth

What FDI is

FDI is investment by a business from one country in productive assets in another, giving it lasting control or significant influence. Forms:

• Greenfield investment: building new facilities (a factory, offices, a store network).
• Brownfield investment / acquisition: buying or merging with an existing foreign business.
• Joint venture: setting up a new business with a local partner, sharing ownership.

FDI differs from portfolio investment, buying shares or bonds without control.

FDI and business growth

FDI is a form of growth that can be organic (greenfield) or inorganic (takeovers, mergers, joint ventures). It lets a firm:

• get inside foreign markets and trading blocs, avoiding tariffs and transport costs;
• cut costs (labour, energy, land) and secure raw materials;
• gain economies of scale by spreading fixed costs such as R&D and branding over global sales;
• spread risk across several economies.

Risks: high capital cost, political and exchange rate risk, culture clashes and the difficulty of managing at a distance.

Recent FDI data

UNCTAD's World Investment Report 2025 found that global FDI fell 11% in 2024, the second year of decline, once volatile conduit flows through a few European economies are excluded. Flows to developed economies fell 22% (Europe fell 58%) while North America rose 23%. Africa rose 75%, mainly because of one very large project in Egypt (12% without it). Digital economy FDI rose 14%.

Use data like this to show that FDI depends on confidence, interest rates and political risk.

Worked example

A retailer invests $80 m opening stores abroad. Annual profit from them is $9.6 m. Calculate the return on investment.

1. ROI = annual profit / investment x 100
2. 9.6 / 80 x 100 = 12%

Answer: 12% a year.

Check yourself

1. A German car maker builds a new factory in Mexico. This is
   • greenfield FDI
   • portfolio investment
   • a joint venture
   • exporting
   Show answer

   greenfield FDI. Building new facilities abroad is greenfield investment.

2. A business invests $45 m in a factory abroad that earns annual profit of $6.3 m. Calculate the return on investment.
   Show answer

   14 %. 6.3 / 45 x 100 = 14%.

3. UNCTAD reported that FDI to Europe fell 58% in 2024. If inflows had been $400 bn, what would they fall to?
   Show answer

   168 $ bn. 400 x 0.42 = $168 bn.

4. Which is portfolio investment rather than FDI?
   • Buying 100% of a foreign competitor
   • Opening a regional head office abroad
   • Forming a 50:50 joint venture abroad
   • An investment fund buying 0.5% of a foreign company's shares
   Show answer

   An investment fund buying 0.5% of a foreign company's shares. A small shareholding gives no control.

5. Explain how FDI inside a trading bloc can help a business grow.
   Show answer

   Producing inside the bloc avoids the common external tariff, so the firm can sell into all member countries tariff free at lower prices, increasing sales and market share.. FDI inside a bloc gives tariff-free access to the whole bloc market.

6. Which is a risk specific to FDI compared with exporting?
   • Customers must be found
   • Products need marketing
   • Prices must be set
   • Assets abroad could be lost through political instability or nationalisation
   Show answer

   Assets abroad could be lost through political instability or nationalisation. FDI puts capital at risk in the host country.

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Sources

• Pearson Edexcel International Advanced Level in Business specification (first teaching 2018)
• UNCTAD: Global foreign direct investment falls for second consecutive year (World Investment Report 2025)

Last updated 8 November 2026. Spotted a mistake? Tell us.