What is a foreign direct investment (FDI)?
A foreign direct investment (FDI) is an investment made by a company or an individual in one country in commercial interests located in another country. In general, FDI takes place when an investor establishes business operations abroad or acquires foreign business assets in a foreign company. However, FDI differs from portfolio investments in which an investor simply buys shares of foreign companies.
Foreign direct investment
Key points to remember
- Foreign direct investment (FDI) is investment made by a company in another located in another country.
- FDI is actively used in open markets rather than closed markets for investors.
- Horizontal, vertical and conglomerate are types of FDI. The horizontal establishes the same type of enterprise in another country, while the vertical is linked but different, and the conglomerate is an independent commercial enterprise.
- The Bureau of Economic Analysis continuously monitors FDI in the United States
- Apple’s investment in China is an example of FDI.
How foreign direct investment works
Foreign direct investment is generally made in open economies that offer a skilled workforce and above-average growth prospects for the investor, as opposed to highly regulated economies. Foreign direct investment often involves more than just capital investment. It may also include management or technology provisions. The essential feature of foreign direct investment is that it establishes effective control or at least substantial influence over the decision-making of a foreign enterprise.
The Bureau of Economic Analysis (BEA), which tracks spending by foreign direct investors in U.S. businesses, reported total FDI in U.S. businesses of $ 253.6 billion in 2020. Chemicals were the largest industry , with $ 109 billion in FDI for 2020.
Countries depend on the United States using their manufacturing capabilities, where the United States offers a great advantage to their economy when used.
Foreign direct investment can be made in a number of ways, including opening a subsidiary or associated company in a foreign country, acquiring a controlling interest in an existing foreign company, or through a merger or joint venture with a foreign company.
The threshold for foreign direct investment which establishes a majority stake, according to the guidelines established by the Organization for Economic Co-operation and Development (OECD), is a minimum participation of 10% in a company established abroad. However, this definition is flexible, as there are cases where an effective controlling interest in a company can be established with less than 10% of the company’s voting shares.
Types of foreign direct investment
Foreign direct investment is generally classified as horizontal, vertical or conglomerate. A horizontal direct investment refers to the investor establishing the same type of business transaction in a foreign country as in his country of origin, for example, a US-based cell phone supplier opening stores in China.
A vertical investment is an investment in which different but related business activities from the main activity of the investor are established or acquired in a foreign country, for example when a manufacturing enterprise acquires an interest in a foreign enterprise which supplies parts or raw materials necessary for the manufacturing enterprise. to make its products.
A type of foreign direct investment conglomerate is one in which a company or an individual makes a foreign investment in a company that is not related to its existing activity in its country of origin. Since this type of investment involves entering a sector in which the investor has no previous experience, it often takes the form of a joint venture with a foreign company already active in this sector.
Example of foreign direct investment
Examples of foreign direct investment include mergers, acquisitions, retail, services, logistics and manufacturing, among others. Foreign direct investment and the laws that govern it can be essential to a company’s growth strategy.
In 2020, for example, Apple, based in the United States, announced an investment of $ 507.1 million to boost its research and development in China, Apple’s third market after the Americas and Europe. The announced investment has relayed the upward trend of CEO Tim Cook towards the Chinese market despite a 12% year-over-year drop in Apple’s revenues in Greater China in the quarter preceding the ad.
The Chinese economy has been fueled by an inflow of FDI targeting the country’s high-tech manufacturing and services, which, according to the Chinese Ministry of Commerce, increased by 11.1% and 20.4% from one year on the other, respectively, in the first half of 2020. FDI regulations in India now allow 100% foreign direct investment in single-brand retail trade without government approval. The regulatory decision would have facilitated Apple’s desire to open a physical store in the Indian market. Until now, the company’s iPhones have only been available through third-party physical and online retailers.