McDonald’s, a globally-recognized fast-food chain, has expanded its operations and established a strong presence in over 100 countries by directly investing in foreign markets. Through wholly-owned subsidiaries, joint ventures, and franchising agreements, the fast-food giant injects capital, creates jobs, and contributes to local economies. The McDonald’s expansion is a prime example of foreign direct investment.

Foreign direct investment (FDI) plays a crucial role in driving economic growth, particularly in developing countries. FDI flows not only bring capital but also technology, expertise, and market access, contributing to the development of both the investor and host countries. Let’s learn more about FDI along with its advantages and disadvantages.

What is Foreign Direct Investment?

Foreign direct investment (FDI) refers to an investment activity where an entity invests in assets or businesses in another country, establishing a degree of control over the foreign enterprise to establish a lasting interest. This lasting interest is established when an investor obtains at least 10% of the voting power in the firm. Apart from money, foreign direct investment also brings knowledge, technology, skills, and employment to the host country. 

Foreign direct investment plays a crucial role in global economic development, as it facilitates the transfer of capital, technology, and expertise across borders, which can lead to increased productivity and economic growth in the host country. One example of foreign direct investment is the One Belt One Road initiative by the Chinese government. It involves massive investments in infrastructure projects across Africa, Asia, and Europe, funded primarily by state-owned enterprises.

What are the Four Types of Foreign Direct Investment?

Foreign direct investment (FDI) can be categorized into several types based on the nature of the investment and the relationship between the investing company and the foreign businesses. These types are:

• Horizontal FDI: Horizontal FDI occurs when a company invests in a foreign company that operates in the same industry and produces similar products. An example of horizontal FDI is when a China-based smartphone manufacturer opens a factory in Indonesia to produce their smartphones.
• Vertical FDI: In vertical FDI, a company invests in a foreign business that is part of its supply chain, either by acquiring suppliers or distributors. For example, McDonald’s purchases a meat processing plant in Canada to supply their restaurants.
• Conglomerate FDI: Conglomerate FDI involves investing in a foreign business that operates in an entirely different industry. For example, US retail company Walmart invest in TATA Motor, an Indian automobile manufacturer.
• Platform FDI: Platform FDI occurs when a company expands into a foreign country to create products that will be exported to third countries. For example, French luxury fashion house Chanel sets up a manufacturing facility in the US and exports products to other countries in America, Asia, and other parts of Europe.

What are the Advantages and Disadvantages of Foreign Direct Investment?

Foreign direct investment offers both benefits and drawbacks that impact both foreign investors and the host country. Here are the advantages and disadvantages of foreign direct investment:

Advantages of FDI

• Boosting Economic Growth: One of the main benefits of FDI is how it can boost the host country’s economic growth by injecting new capital, which can lead to increased production and job creation. The influx of funds often stimulates various economic sectors, which will enhance overall economic performance.

• Facilitating Technology Transfer: Along with investment, foreign investors typically bring advanced modern technologies and innovative management practices to the host country. This transfer of knowledge can improve local productivity and efficiency, fostering innovation within the host country.

• Fostering Employment Generation: The establishment of foreign-owned enterprises creates direct job opportunities for the local population. As these businesses expand, they often require a skilled workforce, thereby reducing unemployment rates and improving living standards.

• Boosting Infrastructure Development: FDI often leads to improvement in infrastructure, such as transportation and communication systems. It not only supports foreign businesses but also benefits the broader economy by facilitating trade and connectivity.

Disadvantages of FDI

• Economic Dependence: The host countries may become overly reliant on foreign investors, which can stifle their domestic growth and innovation. This dependency can hinder the development of local businesses and technologies, which can be disastrous if the foreign investors are gone.

• Income Inequality: The benefits of FDI may not be evenly distributed among the local populations. Profits are often concentrated in the hands of a few foreign investors, which worsens the income inequality within the host country.

• Cultural Clashes: The introduction of foreign companies can sometimes lead to cultural conflicts, impacting local traditions and practices. Without proper regulations, this may cause friction between local populations and foreign entities.

• Loss of Control: Despite its benefits, FDI may cause host countries to lose control over their economies. Foreign companies may dominate local markets, leading to profit repatriation that drains resources from the host country.

Indonesia: Attractive Destination for Foreign Direct Investment

Indonesia has emerged as an attractive destination for foreign direct investment among other ASEAN countries. Being one of the largest economies in Southeast Asia, Indonesia offers various opportunities across various sectors, including downstream mining and metal processing, transportation and infrastructure, digital economy, and renewable energy.

FDI in Indonesia has shown remarkable growth. In the fourth quarter of 2024, FDI in Indonesia reached a record high of Rp245.8 trillion (approx. $55.33 billion), marking a significant year-on-year increase of 33.3% from the previous year. This increase follows an 18.55% growth in the third quarter of 2024, indicating a robust upward trend in foreign investment. The primary sources of Indonesia’s foreign investment include Singapore, Hong Kong, and China. 

Looking ahead, Indonesia aims to attract approximately $545.3 billion in investment by 2040 across various sectors, particularly focusing on downstream manufacturing and transitioning towards a net-zero economy by 2060.

Effist Suite Office: Your Reliable Office Solution for Expanding into Indonesia

For foreign companies who are looking to expand their reach to Indonesia, Effist Suite Office offers comprehensive office solutions through our serviced office and virtual office services catered for businesses of all sizes. 

Serviced office by Effist Suite Office provides a ready-to-use working space equipped with modern technologies, including an ergonomic working station, high-speed internet, executive office equipment, meeting rooms in various sizes, a business lounge, a pantry, and secretarial and cleaning services. You can focus on your core business activities while we handle your office space needs.

We also offer a virtual office solution for foreign companies who are looking for a cost-effective and flexible option for establishing a local presence. Our virtual office service includes prestigious business addresses, professional secretarial support, meeting rooms of all sizes, building domicile letter, and mail handling services. Located in strategic South Jakarta locations, Gandaria 8 Office Tower and 88Office Kota Kasablanka, Effist Suite Office provides the perfect environment for your business to thrive.

Contact us today at contact@effist.com to learn more about our serviced office and virtual office or visit our “Book Tour” page.

Editor: Trie Ayu Feminin & Irnadia Fardila