Final answer:
Typically, a foreign direct investment (FDI) is required when companies enter emerging markets for the first time, providing not only capital but also management expertise and technology. Developing nations need to create a stable and attractive environment for foreign investors to protect against financial instability.
Step-by-step explanation:
Typically, a foreign direct investment (FDI) is required when companies enter emerging markets for the first time. This form of investment often involves taking a significant ownership stake in a business, usually with the intention of having a degree of managerial control. Unlike portfolio investments, FDIs are not just about financial contributions; they involve transferring management skills, technology, and sometimes new business practices.
For developing countries to grow rapidly, they must attract inexpensive capital to invest in new businesses and enhance productivity. Access to international markets is also crucial. FDIs provide a means through which developing nations can receive the necessary capital, expertise, and technological know-how to boost their economic sectors. However, to encourage foreign investments and prevent negative scenarios like capital flight and banking system collapse, these countries must create a favorable investment climate. Measures may include stable political and economic policies, incentives for foreign investors, robust legal systems to protect investments, and transparent regulations.
The experience of the Asian financial crisis illustrates the dangers of unregulated capital flows and underscores the importance of managing the process of attracting FDIs carefully.