What is direct investment
Direct investment, more commonly known as foreign direct investment (FDI), refers to an investment in a foreign commercial enterprise intended to acquire a controlling interest in that enterprise. Direct investment provides capital financing in exchange for an equity purchase of a company’s shares without purchasing common shares.
BREAKDOWN Direct investment
The object of foreign direct investment (FDI) is to gain sufficient participation to ensure the control of a business. In some cases, this implies that a business in one country opens its own business operations in another country, while in other cases, it involves acquiring control of the existing assets of a business already active in the country. foreign. Direct investment may involve the acquisition of a majority stake in a business or a minority stake large enough to provide the investor with effective control of the business.
Direct investment differs mainly from portfolio investment, the purchase of ordinary or preferred shares of a foreign company and the element of control sought.
Control can come from sources other than capital investment, although control of things such as technology are only essential inputs. In fact, foreign direct investment is often not a simple monetary transfer of ownership or control, but also involves complementary factors, such as organizational and management systems or technology.
Foreign direct investments can be made by individuals, but most often by companies wishing to establish a commercial presence in a foreign country.
Examples of foreign direct investment
Foreign direct investment takes many forms in practice but is generally classified as vertical, horizontal or conglomerate investment.
A vertical direct investment is an investment in which the investor adds foreign activities to an existing business, as in the case of an American car manufacturer that establishes concessions or acquires a parts supply business in a foreign country.
Horizontal direct investment is perhaps the most common form. In horizontal investments, a business that already exists in one country simply establishes the same business operations in a foreign country, as in the case of a fast food franchise based in the United States that opens restaurants in China. Horizontal direct investment is also called entry into a foreign market.
The least common form of direct investment conglomerate is when an existing business in a country adds an independent business transaction in a foreign country. This is a particularly difficult form of direct investment, as it requires both the creation of a new business and its establishment in a foreign country. An example of direct conglomerate investment could be an insurance company opening a resort in a foreign country.