What is Foreign Direct Investment (FDI)?
The term Foreign Direct Investment (FDI) embodies an ownership stake in a foreign company or project by a company, investor, or government from another country. It’s aimed at acquiring a substantial stake or outright ownership in a foreign business for expansion and integration into a new region. FDI significantly contributes to worldwide economic integration, fostering long-term relationships between economies.
Key Highlights
- Substantial and Long-lasting: FDI investments are typically significant and enduring, backed by an active involvement in the management and operations of the invested entity.
- Diversified Objectives: These investments may target raw material acquisition, expanding operational footprints, or establishing a multinational presence.
- Leading Recipients: Over the years, the United States and China have been the predominant recipients of FDI.
- Significant Contributors: The US and other OECD countries have been notable for their substantial FDI contributions across the globe.
The Mechanics of FDI
FDI is not merely a capital infusion into an entity. It often encompasses providing management expertise, technological support, and equipment. Critical to FDI is the degree of control or significant influence over the foreign business’s decision-making processes.
With an estimated $1.28 trillion in FDI in 2022, the United States, followed by China, Brazil, Australia, and Canada, topped the list of FDI destinations. Conversely, for FDI outflows, the powerhouse contributors were the US, Japan, China, Germany, and the UK.
FDI and GDP
FDI inflow compared to a nation’s GDP serves as a reliable indicator of its investment appeal. For instance, in 2022, FDI accounted for 1.0% of China’s GDP and 1.5% of the US’s GDP.
Special Considerations for FDI
FDI can be structured in various ways, including establishing a subsidiary, acquiring a significant stake, or entering into mergers or joint ventures with foreign enterprises.
The OECD defines a controlling interest One existing guideline suggests a minimum threshold of 10% ownership in a foreign entity, although control can sometimes be asserted with smaller percentages of voting shares.
Types of FDI
- Horizontal FDI: Involves setting up the same type of business operations in a foreign country. For instance, a US-based cellphone provider buying a chain of phone stores in China.
- Vertical FDI: Occurs when a company acquires a complementary business. An example would be a US manufacturer purchasing a foreign supplier of raw materials.
- Conglomerate FDI: This involves investing in an entirely different business sector abroad, often necessitating joint ventures.
Inspirational Examples of FDI
FDI sets the stage for global business dynamics and often involves high-profile cases:
- Regulatory Scrutiny: The Nvidia-ARM acquisition was drastically examined by regulatory bodies due to its potential to undermine competition in semiconductor industries.
- Global Initiatives: The Belt and Road Initiative by China epitomizes FDI, fortifying worldwide infrastructure and fostering deep economic ties.
Distinguishing FDI and Foreign Portfolio Investment (FPI)
Foreign portfolio investment (FPI) entails adding international assets to the portfolio of investors, individual or institutional, and represents a form of portfolio diversification distinct from the more engaged and controlling commitment of FDI.
Advantages and Disadvantages of FDI
FDI assists in sustaining economic growth across recipient and investing nations by creating jobs, fostering infrastructure development, and expanding market reach. Nonetheless, it encompasses multifold regulations across countries, posing potential political risks.
Conclusion
FDI represents a massive and vital component of global financial flows, predominantly steered by major economies like the US and China. While foreign portfolio investment deals with securities, FDI takes it further by affecting substantial changes on the ground level globally.
Related Terms: investor, economy, GDP, capital investment, portfolio investment
References
- OECD iLibrary. “Foreign Direct Investment (FDI)”.
- OECD. “FDI in Figures”, Page 1.
- OECD. “FDI in Figures”, Pages 3-4.
- The World Bank. “Foreign direct investment, net inflows (% of GDP) - China, United States”.
- The World Bank. “Foreign direct investment, net inflows (% of GDP) -”.
- United Nations. “Global FDI Flows Down 42% in 2020”, Page 1.
- United Nations. “Global FDI Flows Down 42% in 2020”, Page 3.
- OECD. “FDI in Figures”, Page 1.
- Ministry of Commerce, People’s Republic of China. “Regular Press Conference of the Ministry of Commerce (July 13, 2017)”.
- Press Information Bureau, Government of India, Ministry of Commerce & Industry. “Guidelines for Single Brand Retail Trade”.
- The Guardian. “Watchdog raises concerns over Nvidia’s takeover of UK chip designer ARM”.
- CNBC. “Doomed from the start? Why Nvidia failed to buy ARM from SoftBank”.
