Foreign Direct Investment: Definition, Types, Examples, Roles and Benefit

Types of Foreign Direct Investment, Stock, Policy and Strategy

Well, a foreign direct investment (that is also known as FDI) is simply a controlling ownership in a business enterprise in one country by an entity that is based in another country. That is quite straightforward. Nevertheless, you need to know something important.

You might have come across this somewhere before, and you wonder what it means and entails. Well, today, you’re going to having a better understanding of what we call Foreign Direct Investment, as well as the benefits of new forms of foreign direct investment in developing countries.

You see, Foreign Direct Investment is different from what we call Portfolio Foreign Investment (a passive form of investment in other countries’ securities such as public bonds and stocks, by the element of ‘control’). Experts said that standard definitions of control use the internationally agreed 10 percent threshold of voting shares (but this is a complicated situation because many times, smaller blocks of share will command control in widely held companies). And also, control of management, technology, even inputs can confer de facto control.

However, we need to know that the origin of the investment does not impact the definition as a Foreign Direct Investment. The investment may be made either by we can call ‘inorganically’ (by buying a company in the target country) or ‘organically (by simply expanding operations of an existing business in that country). This is one method to increase fdi in developing countries.

Foreign Direct Investment Definition

The fact remains that, if we are to go broadly, foreign direct investment includes such vital things as ‘mergers and acquisitions, building new facilities, reinvesting profits earned from overseas operations and intra company loans’. That is broadly, right. Let us now see it from a narrow sense.

Now, in a narrow sense, foreign direct investment refer just to building new facilities. Yeah, the numerical FDI figures based on varied definitions are not easily comparable.

Now, as a part of the national accounts of a country and in regard to the foreign direct investment: GDP equation Y=C+I+G+ (X-M) [CONSUMPTION+GROSS INVESTMENT+GOVERNMENT SPENDING + (EXPORTS-IMPORTS]. Note, I is domestic investment (i.e. inflow minus outflow) to acquire what is known as a lasting management interest (i.e. 10 percent or more of voting stock) in an enterprise that is operating in an economy that is other than that of the investor.

Foreign Direct Investment (FDI) is actually the sum of equity capital (that is other long-term capital and short-term capital as shown the balance of payments). Also, we need know that Foreign Direct Investment usually involves participation in management, transfer of technology, joint-venture, and expertise. A foreign direct investment is a controlling ownership in a business enterprise in one country by an entity that is based in another country. This quality of this ownership influence determines the advantages and disadvantages of foreign direct investment in a foreign market.

Foreign Direct Investment: Theoretical Background

The reasons behind Foreign Direct Investment and Multinational Corporations were really explained by what we know as neoclassical economics that is based on macroeconomic principles. And, these theories were known to be based on The classical theory of trade in which the motive behind trade was a result of the difference in the costs of production of goods between two countries; and of course, focusing on the low cost of production as a motive for a firm’s foreign activity. And also, the neoclassical theories were known to be created under the assumption of the existence of perfect competition.

Types Of FDI

What are the 3 types of foreign direct investment? Here are some foreign direct investment types:

1. Platform Foreign Direct Investment:

The Platform FDI is simply known as a foreign direct investment from a source country into a destination country (and for the purpose of exporting to a third country). This results in the impact of foreign direct investment on economic growth in the retail sector of these countries.

2. Horizontal Foreign Direct Investment:

The Horizontal FDI is said to arise when a firm duplicates its home country-based activities (at the same value chain stage) in a host country through FDI.

3. Vertical Foreign Direct Investment:

The Vertical FDI is said to take place when a firm (through FDI), moves upstream (or downstream) in different value chains. What we are saying is that, when firms perform value-adding activities in several phases following a vertical pattern in that host country.

Foreign Direct Investment: Methods

Investors through their Foreign direct investment companies may have access to voting right of a business in an economy through methods such as:

1. Acquiring shares in an associated enterprise.
2. A merger or an acquisition of an unrelated enterprise.
3. Incorporating a wholly owned subsidiary or company anywhere.
4. Also, participating in an equity joint venture with another enterprise (or investor)

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