Explain the special nature of foreign direct investment (FDI).

Question

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Answer 1

The special nature of foreign direct investment (FDI) relates to the sector of economic activity, technological sophistication, and pattern of ownership. There are three sectors of economic activity: (1) the primary sector, which consists of agriculture, forestry, and mineral exploration and extraction; (2) the industrial sector, consisting of manufacturing operations; and (3) the service sector, which includes transportation, finance, insurance, and related industries. Levels of technological sophistication characterize science-based industry and non-science-based industry. The difference between them is that science-based industry requires the continuous introduction of new products or processes. Patterns of ownership relate to whether businesses are wholly or partially owned. The special nature of FDI can be categorized as one of five types. Type I is the highest-risk venture; type V is the lowest-risk venture. This risk factor is assigned based on sector, technology, and ownership. Primary sector industries usually have the highest risk factor, service sector industries have the next highest, and industrial sector industries have the lowest. Firms with technology that is not available to the government should the firm be taken over have lower risk than those with technology that is easily acquired. Wholly owned subsidiaries have higher risk than partially owned subsidiaries.