Foreign Direct Investment

Foreign Direct Investment (FDI) is the outcome of the mutual interest of multinational firms and host countries. While multinational firms with the expectation of earning relatively higher rate of return on their investments, invest in foreign markets, such investments have proved to be playing an important role in the development of economy. This paper examines the various aspects of FDI from investing firms as well as from receiving countries' point of views. The paper mainly focuses on the risk and return from firms' perspective and on the strategies to attract FDI from host countries' point of view. An examination of stockholders' responses to the announcement of FDI in emerging markets shows their positive responses as indicated by the risk adjusted rate of return higher than the expected on investments during the period surrounding the announcements. The higher rate of return is, in fact, the result of existing market opportunities combined with the host country's policies towards FDI. This paper has four parts: part I is the introduction on globalization of market and dominance of FDI; part II examines the risk adjusted rate of return on FDI in emerging markets; part III deals with the international risk exposure; and part IV prescribes a model for determining a required level of incentives and/or disincentives to be offered for investing firms to consider investment in the country.