Chapter 20.2, Problem 1R

To determine

To Discuss: The significance of Foreign Direct Investment.

Explanation of Solution

The term foreign direct investment refers to the situation under which one particular country invests in another country's investment policy, in shares, bonds, and capital. Foreign direct investment also occurs when one establishes its business or market outside the region or in a different country.

The significance of foreign direct investment are as follows:

• Foreign direct investment helps the developing or under developing country to increase its circular flow of money in the economy. Thus, it also helps in increasing the funds, increase the interest rates and bank rates, and thus also increases the new technology in the country.
• The investment in the developing country helps in a hike in the process of exports and imports. As the exports increase, the demand for a product increases, and if the imports increase, it helps in the inflow of new markets from another country and thus increases monetary funds.
• Foreign direct investmentalso helps in an increase in employment leveland thus, decreases unemployment level. As a result, it helps in an increase in the job level and literacy rate.