Foreign direct investment

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This article is about economics. For the magazine, see FDi magazine.

Foreign direct investment (FDI) in its classic form is defined as a company from one country
making a physical investment into building a factory in another country. It is the establishment of
an enterprise by a foreigner. [1] More specifically, Foreign direct investment is a cross-border
corporate governance mechanism through which a company obtains productive assets in another
country.[2] Its definition can be extended to include investments made to acquire lasting interest
in enterprises operating outside of the economy of the investor.[3] The FDI relationship consists
of a parent enterprise and a foreign affiliate which together form an international business or a
multinational corporation (MNC). In order to qualify as FDI the investment must afford the
parent enterprise control over its foreign affiliate. The IMF defines control in this case as owning
10% or more of the ordinary shares or voting power of an incorporated firm or its equivalent for
an unincorporated firm; lower ownership shares are known as portfolio investment.[4]

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[edit] History
Foreign direct investment (FDI) is a measure of foreign ownership of productive assets, such as
factories, mines and land. Increasing foreign investment can be used as one measure of growing
economic globalization. Maps below show net inflows of foreign direct investment as a
percentage of gross domestic product (GDP). The largest flows of foreign investment occur
between the industrialized countries (North America, North West Europe and Japan). But flows
to non-industrialized countries are increasing.

US International Direct Investment Flows:[5]

Period FDI Outflow FDI Inflows Net

1960-69 $ 42.18 bn $ 5.13 bn + $ 37.04 bn
1970-79 $ 122.72 bn $ 40.79 bn + $ 81.93 bn
1980-89 $ 206.27 bn $ 329.23 bn - $ 122.96 bn
1990-99 $ 950.47 bn $ 907.34 bn + $ 43.13 bn
2000-07 $ 1,629.05 bn $ 1,421.31 bn + $ 207.74 bn
Total $ 2,950.69 bn $ 2,703.81 bn + $ 246.88 bn

[edit] Type of Foreign Direct Investors

A foreign direct investor may be classified in any sector of the economy and could be any one of
the following:[citation needed]

• an individual;
• a group of related individuals;
• an incorporated or unincorporated entity;
• a public company or private company;
• a group of related enterprises;
• a government body;
• an estate (law), trust or other societal organisation; or
• any combination of the above.

[edit] Methods of Foreign Direct Investments

The foreign direct investor may acquire 10% or more of the voting power of an enterprise in an
economy through any of the following methods:

• by incorporating a wholly owned subsidiary or company

• by acquiring shares in an associated enterprise
• through a merger or an acquisition of an unrelated enterprise
• participating in an equity joint venture with another investor or enterprise

Foreign direct investment incentives may take the following forms:[citation needed]

• low corporate tax and income tax rates

• tax holidays
• other types of tax concessions
• preferential tariffs
• special economic zones
• investment financial subsidies
• soft loan or loan guarantees
• free land or land subsidies
• relocation & expatriation subsidies
• job training & employment subsidies
• infrastructure subsidies
• R&D support
• derogation from regulations (usually for very large projects)