What is FDI (foreign direct investment)?

An investor, firm, or government from another nation invests in a foreign enterprise or project. The word usually refers to a commercial decision to buy or acquire a large part of a foreign company to grow into a new territory. The word rarely relates to a foreign firm’s stock investment alone. International economic integration relies on FDI’s solid and long-term linkages between economies.

What Is the Process of Foreign Direct Investment (FDI)?

Governments and companies seeking foreign direct investment (FDI) choose open economies with competent workforces and high development potential. Light government regulation is also valued. FDI often exceeds the capital investment. Management, technology, and equipment may be provided. Foreign direct investment gives foreign businesses power or significant influence over their decisions.

The net amount of FDI in 2021 was above $1.8 trillion. China, Canada, Brazil, and India were the following countries to attract the most FDI that year. The U.S. led FDI outflows, followed by Germany, Japan, China, and the U.K.

The percentage of GDP in FDI inflows may indicate a country’s long-term investment appeal. Although the Chinese economy is smaller than the U.S., FDI as a proportion of GDP was 1.7% in 2020, compared to 1.0% in the U.S. In smaller, dynamic economies, FDI as a proportion of GDP is generally higher: 110% for the Cayman Islands, 109% for Hungary, and 34% for Hong Kong (2020).

United Nations Conference on Trade and Development: The COVID-19 epidemic slowed foreign direct investment worldwide in 2020. Compared to $1.5 trillion the year before, worldwide investment was $859 billion. In 2020, China attracted $163 billion in total investment, surpassing the U.S.’s $134 billion. Global FDI rose 88% in 2021.

Special Considerations

To make a foreign direct investment, companies can launch a subsidiary or associate firm, acquire a controlling interest in an existing foreign company, or form a merger or joint venture with them.

The OECD standards require a minimum 10% ownership holding in a foreign business for FDI to acquire a controlling interest. The definition is flexible. Controlling interest in a corporation can be done by reaching fewer than 10% of its voting shares.

Foreign Direct Investment Types

FDIs are usually horizontal, vertical, or conglomerate. With horizontal FDI, a corporation works in a foreign nation like home. Example: A U.S. cellular operator buys a Chinese phone retail chain.

Vertical FDI involves buying a complementary foreign enterprise. For instance, a U.S. business may invest in a foreign raw material supplier.

Conglomerate FDI involves investing in a foreign firm unrelated to its primary operation. A joint venture is typical because the funding business has no experience in the foreign company’s field.

Foreign Direct Investment Examples

Foreign direct investments might entail retail, services, logistics, or manufacturing mergers, acquisitions, or partnerships. An international approach for firm expansion is indicated.

They may face regulatory issues. In 2020, Nvidia announced its acquisition of ARM, a U.K. chip creator. In August 2021, the U.K.’s competition authority announced a probe into whether the $40 billion agreement would restrict competition in the semiconductor chip industry. The deal was canceled in February 2022.

China-India FDI

China’s economy has grown thanks to FDI in high-tech manufacturing and services. Newly revised Indian FDI restrictions enable 100% foreign direct investment in single-brand retail without government clearance.

How are FDI and FPI different?

Foreign portfolio investment (FPI) involves adding overseas assets to a firm, pension fund, or individual investor’s portfolio. It consists of diversifying a portfolio by buying foreign stocks or bonds. FDI entails a significant investment or acquisition of a foreign firm, not merely its securities.

Foreign direct investment is a more significant investment to boost a firm. FDI and FPI are typically encouraged, especially in rising nations. FDI requires companies to comply with the host country’s laws.

What are the advantages and drawbacks of FDI?

FDI helps both the recipient and investing countries prosper economically. Developing countries have welcomed FDI to finance infrastructure and local jobs. However, FDI allows multinationals to enter worldwide markets. A drawback of FDI is the need for many governments to regulate and oversee it, increasing political risk.

What are some examples of FDI?

One of the most significant examples of FDI globally is the Chinese program, One Belt, One Road (OBOR). China is investing heavily in infrastructure projects in Africa, Asia, and Europe under the Belt and Road Initiative. Chinese state-owned firms and government-affiliated groups sponsor the initiative. Japan, the U.S., and the E.U. have similar initiatives.

Bottom Line

Direct investment by enterprises or governments in overseas firms or projects is FDI. Global cash flows total about $2 trillion, with the U.S. and China dominating FDI inflow figures. For smaller and emerging nations, FDI may be a significant GDP contributor. Foreign portfolio investment (FPI) is similar to FDI but entails holding company securities (e.g., shares in foreign corporations).

Conclusion

• FDIs are significant, long-term investments by companies or governments in overseas companies.
• FDI investors often hold controlling stakes in domestic enterprises or joint ventures and actively oversee them.
• Investment may entail buying supplies, expanding a firm, or going global.
• The U.S. and China have received the most FDI in recent years.
• The U.S. and other OECD nations have led global FDI.