Foreign Direct Investment

Quick Summary of Foreign Direct Investment

Direct investments in productive assets by a company incorporated in a foreign country, as opposed to investments in shares of local companies by foreign entities. An important feature of an increasingly globalized economic system.

FDI (foreign direct investment) refers to investments made by a company in another country to create a business entity or production facility, for example, to construct a factory or manufacturing plant. It is different from indirect investments such as portfolio investments, in which money is passively invested. In the current scheme of things, direct investment has also come to include an interest in the management of a company outside the territory of a nation. The different forms of investment include the construction of a facility, acquiring control over a foreign company and entering into an alliance or forming a part of a joint venture with a regional firm.

In recent years, FDI has been instrumental in the globalization of business.

FDI (foreign direct investment) Categories

There are three broad types of category by which foreign direct investment may be differentiated – direction, motive and target. Foreign direct investment is also categorized by the direction of money flow – inward and outward.

FDI Direction (Investment Direction)

This category looks at the direction of the money flow.

• Inward FDI analyses the investment by looking at the recipient market, ie the market or country in to which the FDI flows, and in which the money will be invested
• Outward FDI analyses the source country of the investment, normally the country in which the investing country has its head office or the country in which it has raised funds

FDI Target (Investment Target Or Objective)

This categorization looks at the target or objective of the investment.

• Greenfield FDI or greenfield investment – an investment that will create a new facility or operation from scratch. Backward FDI implies a positive effect on the investing companies’ position with their vertical market in the source country or outward FDI market
• Vertical FDI or vertical investment – an investment that seeks to build upon or consolidate a vertical market position
• Horizontal FDI or horizontal investment – an investment that seeks to expand horizontally across market segments within the target market or inward FDI market

FDI Motive (Investment Motive)

This categorization looks at the driving force that has caused the investing company to seek foreign investment.

• Resource-seeking investment– an investment to gain access to natural resources such as oil, gas, coal, metals, building materials, precious stones or agricultural products, or to derivative or processed resources such as petroleum, steel, cement, jewellery or foodstuffs
• Efficiency-seeking investment– an investment fo efficiency gains within the business. This might result from the lower wages, reduced processing, logistics or transportation costs, or access to efficiency-enhancing technology
• Market-seeing investment– an investment designed to gain access to the consumer, B2B, industrial or governmental marketplace of the target-market for the FDI inflow
• Strategic-asset-seeking investment – an investment that secures a strategic asset for the company, such as intellectual property rights, regulatory protection or concessions.

Major FDI Recipients

These are the major recipients of foreign direct investment or FDI inflows as of 2006:

• United States of America
• Belgium
• United Kingdom
• Netherlands
• Hong Kong
• Spain
• Germany
• Canada
• China
• Italy
• France
• Russia

FDI And FII Or Foreign Institutional Investor

FDI is the investment made in capital goods such as machinery, while an FII or Foreign Institutional Investor is an investor who makes investments made mainly in capital markets to buy stocks, debentures and government or company securities or bonds.

Examples of Foreign Direct Investment in a sentence

You may want to make sure that you know what the exchange rate is when you are dealing with a foreign direct investment.

We had decided to engage in foreign direct investment as a way of diversifying our wealth and investing in ideas we believe in and support.

Proponents of supporting local economic growth are understandably opposed to sending investment money elsewhere by way of foreign direct investment.

Synonyms For Foreign Direct Investment

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Definition Sources