Foreign Direct Investment (FDI) is the single most important mechanism for the globalization of the international economy. FDI is the investment of real assets in a foreign country, it is acquiring assets such as land and equipment in another host country, but operating the facility from the home country. FDI is viewed by many as necessary to stimulate the economies of both developed and underdeveloped countries. The global economy experienced a decrease in foreign investment flows. Developing countries have been hit the hardest by the decline in FDI as foreign investment is being redirected to more developed countries. It is expected that FDI will continue to be the most significant tool for globalization.

It is widely accepted that FDI inflows provide economic benefits such as increased competition, technological spillovers and innovations, and increased employment. The impact of foreign investment extends far beyond economic growth. FDI can be a catalyst for change to society as a whole, therefore one must think in terms of economic, political, social, technological, cultural, and environmental factors and examine all the effects of FDI in order to interpret the true long-term impact. Foreign investment and globalization continues to increase, developing countries desperately seeking to attract foreign investment can have undesirable outcomes. FDI can have numerous negative effects, such as job loss, human rights abuses, political unrest, financial volatility, environmental degradation, and increased cultural tensions.

The results of FDI on the global economy are complex and unpredictable, yet they can vary from country to country. This is due in part to the practices that are in place prior to receiving FDI inflows, such as deep-rooted social customs, political practices, laws and regulations. In more developed countries foreign direct investment resulted in rapid economic growth and social development and in unstable economies, underdeveloped countries, the results can be quite different.

Types of Foreign Direct Investment

According to Ali & Guo (2005) states the main types of FDI in world are Equity Joint Ventures, Contractual Joint Ventures and the establishment of Wholly Foreign Owned Enterprises. Contractual joint ventures were initially the most important in the world. Equity joint ventures and wholly foreign owned enterprises became predominant and recent years have seen a proliferation of wholly foreign owned enterprises. Equity joint ventures have been a popular entry mode for two reasons. Ali & Guo (2005) stated that most governments believes that equity joint ventures best serve the objective of foreign capital, technology, and management experiences. Secondly, foreign investors hope through engaging in joint ventures to get local partner’s assistance in the domestic markets. Foreign investors have chosen wholly foreign owned enterprises as the preferred entry mode in recent years so as to avoid problems associated with equity joint ventures.