Simone Lawson
Foreign direct investment (FDI) is a substantial, long-term investment made by a company or government into a foreign project or firm. It is a key element in international economic integration, creating stable and long-lasting links between economies. FDI can be made through various methods, including reinvesting profits from overseas operations, intra-company loans to overseas subsidiaries, mergers and acquisitions, building new facilities, and establishing subsidiaries or joint ventures. FDI is distinguished from foreign portfolio investment (FPI) by the element of control, where FDI investors typically seek to acquire a controlling ownership stake of at least 10% in the foreign company. FDI can be further categorized into types such as horizontal FDI, vertical FDI, conglomerate FDI, and platform FDI, among others.
| Characteristics | Values |
|---|---|
| Type of Investment | Foreign Direct Investment (FDI) |
| Investment Type | Long-term, substantial |
| Investor Type | Company, government, or individual |
| Investment Destination | Foreign company, project, or firm |
| Investor's Country | Foreign country |
| Control | Direct control or significant influence |
| Investment Methods | Opening a subsidiary, acquiring controlling interest, mergers and acquisitions, reinvesting profits, intra-company loans, horizontal FDI, vertical FDI, conglomerate FDI |
| Investment Considerations | Growth prospects, skilled workforce, light government regulation |
| Investment Exclusions | Purchase of shares resulting in <10% control |
Explore related products
What You'll Learn
Greenfield investment
A greenfield investment involves a company constructing new ("green") facilities, such as sales offices, manufacturing plants, distribution centres, and employee housing. These projects are typically undertaken by multinational corporations (MNCs) and can provide significant economic benefits to host countries, including job creation and local development. Developing countries often attract prospective companies by offering tax breaks, subsidies, or other incentives. For example, between 2003 and 2020, Bangladesh received $34.9 billion in greenfield FDI, resulting in new businesses in key sectors like manufacturing, textiles, and power.
In 2006, Hyundai Motor Company made a significant greenfield investment in the Czech Republic, establishing a new manufacturing plant that employed up to 3,000 people in its first year. The Czech Government provided tax relief and subsidies to encourage this investment, aiming to boost the economy and reduce unemployment. Greenfield investments can also lead to improvements in labour skills and provide economies of scale and scope in marketing, research and development, and production.
While greenfield investments offer the greatest control over operations, they differ from indirect investments, such as the purchase of foreign securities, where companies may have little to no control over daily operations. A middle ground between these two extremes is brownfield investment, where a company leases and adapts existing facilities, resulting in lower expenses and quicker turnaround times.
Objections to the Constitution: A Flawed Foundation?
You may want to see also
Brownfield investment
The clear advantage of brownfield investment is the reduced cost and time of starting up, as the buildings are already constructed and up to code. This strategy can result in cost savings for the investing business and help avoid certain steps required for building on empty lots, such as obtaining building permits and connecting utilities. Brownfield investment also allows access to a new foreign market swiftly, with lower staffing and training costs due to the existing workforce. It may also include existing approvals and licenses, making it a cost-effective option compared to greenfield investment.
However, brownfield investment also has potential disadvantages. The existing facilities may require major upgrades, increasing foreign investment costs. The facility may be old and require high maintenance and upkeep costs. There could be operational inefficiencies if the facility cannot adapt to new production needs, and there may be scalability and expansion issues with using pre-constructed facilities.
An example of brownfield investment is Vodafone's acquisition of a majority stake in Hutchison Essar, an India-based company, for $10.9 billion in 2007. This allowed Vodafone to penetrate the fast-growing Indian telecommunications industry.
Forensic Photography: False Representation and Its Unclear Boundaries
You may want to see also
Horizontal FDI
A classic example of Horizontal FDI is Toyota's investment in a car manufacturing plant in the United States. As Toyota already manufactured cars in Japan, setting up similar operations in the US allowed them to capture a share of the vast US automobile market and optimise their costs.
The key characteristic of Horizontal FDI is the replication of business operations in a foreign market. This allows companies to leverage their existing expertise and resources in a new country, potentially gaining market share and reducing costs.
In summary, Horizontal FDI is a prevalent form of FDI where companies expand their existing operations into foreign markets, seeking growth opportunities and cost advantages. This type of investment plays a significant role in international economics and shapes the strategies of multinational corporations.
Replica Constitution: Where to Buy on a Budget
You may want to see also
Explore related products
Vertical FDI
Foreign direct investment (FDI) is a substantial, long-term investment made by a company or government into a foreign project or firm. FDI involves direct investment by companies or governments into foreign firms or projects. It is a key element in international economic integration, creating stable and long-lasting links between economies. FDI investors typically take controlling positions in domestic firms or joint ventures and are actively involved in their management.
Forward vertical FDI occurs when a company takes over a distributor in a foreign country or establishes its own distribution network to sell its goods and services in a foreign market. This can be particularly useful when foreign dealers are reluctant to carry and sell the company's products. For example, an American car manufacturer might struggle to sell its cars in Japan due to many Japanese auto dealers' reluctance to carry foreign vehicles. In this case, the manufacturer might engage in vertical FDI and build a distribution network of its own in Japan to overcome this problem.
Backward vertical FDI occurs when a company establishes operations as, or assumes control of, an existing supplier that fits into its supply chain. Companies engaging in backward vertical FDI typically seek to improve costs, including raw materials and/or labour, or the supply of certain key components. For example, a carmaker might acquire a foreign steel supplier to avoid paying market-driven prices for steel, which can fluctuate dramatically depending on overall supply and demand.
Companies engaging in vertical FDI typically seek to either lower the cost of raw materials or gain greater control of their supply chain. Vertical FDI can also be used to address difficulties in finding distributors in different markets, especially in new countries.
The Constitution's Language: Exploring the Fundamentals
You may want to see also
Conglomerate FDI
Conglomerate Foreign Direct Investment (FDI) is one of the four main types of FDI, the other three being horizontal, vertical, and platform. Conglomerate FDI involves an individual or corporation investing in a foreign business that is unrelated to their present company. In other words, it is not linked directly to the investor's business. For example, Walmart, a US retailer, may invest in BMW, a German automobile manufacturer. This type of FDI is often made in a completely different industry.
The critical aspect of FDI is that it is considered a long-term partnership, with investors seeking to gain a long-term stake and control in the economic entity. This is often achieved by acquiring a significant ownership stake of more than 10% in the foreign company, which gives the investor lasting interest and influence over the company's management.
Offer Letters: Employment Contracts or Not?
You may want to see also
Frequently asked questions
Foreign Direct Investment (FDI) is a substantial, long-term investment made by a company or government into a foreign project or firm.
Foreign portfolio investment (FPI) involves owning the securities issued by firms such as stock in foreign companies rather than direct capital investments. FDI, on the other hand, involves a controlling ownership stake in a foreign company.
The main types of FDI are horizontal and vertical FDI. Horizontal FDI occurs when a business expands its domestic operations to a foreign country, conducting the same activities in a new market. Vertical FDI involves a business expanding into a foreign country by moving to a different level of the supply chain.
FDI typically involves a substantial investment, with effective control or significant influence over the foreign business's decision-making. FDI can also provide access to new sources of materials, expand a company's footprint, or develop a multinational presence.
FDI can bring benefits such as greater employment opportunities, stimulation of the domestic economy, and access to new technologies and management methods. However, there are also potential drawbacks, including the risk of local businesses being displaced by large foreign corporations and profit repatriation, resulting in capital outflows.
