Which scenario best demonstrates foreign direct investment?

• A. An Italian firm purchases stocks of a U.K. company.
• B. A Canadian retailer imports electronics from Japan to sell in its stores.
• C. A German company exports machinery to Brazil.
• D. A U.S. car manufacturer builds and operates a factory in Mexico.

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the definition of Foreign Direct Investment (FDI). FDI occurs when a company or individual from one country makes a physical investment into building a factory or acquiring a lasting interest in a business in another country, typically involving control or significant influence over the foreign business operations.
2. Step 2: Analyze each scenario to see if it involves a physical investment or control over operations in a foreign country. For example, purchasing stocks is a financial investment but does not imply control or direct management.
3. Step 3: Identify that importing goods or exporting products involves trade activities, not direct investment in foreign production or operations.
4. Step 4: Recognize that building and operating a factory in another country involves establishing a physical presence and control over production, which fits the definition of FDI.
5. Step 5: Conclude that the scenario where a U.S. car manufacturer builds and operates a factory in Mexico best demonstrates foreign direct investment because it involves direct control and investment in foreign production facilities.