What is Foreign Direct Investment? Types

Foreign Direct Investment (FDI)

Foreign direct investment is yet another important source of funds for a country. This type of investment implies the ownership of assets in one country by the residents of another country. This type of investment is generally done with the intent of gaining control over various economic activities such as production and distribution in the host country.

Foreign Direct Investment

Definition of Foreign Direct Investment

The united Nation’s World Investment Report (UNCTAD, 1999) Defines FDI as, “an investment involving a long-term relationship and reflecting a lasting interest and control of a resident entity in one economy in an enterprise resident in an economy other than that of the foreign direct investor.

The International Monetary Fund’s Balance of Payments Manual Defines__” An investment that is made to acquirea lasting interest in an enterprise operating in an economy other than that of the investor, the investor’s purpose being to have an effective voice in the management of the enterprise”.

Types of Foreign Direct Investment

  1. Horizontal Foreign Direct Investment: This refers to the investment by an organization in the same industry in foreign country. EX: Microsoft decided to open a new factory developing software in Africa, it would be deemed to be a horizontal foreign direct investment.
  2. Vertical Foreign Direct Investment: This type of FDI undertaken by an organization for selling the products or services made by the domestic organizations. It may also involve providing inputs to the domestic firms.
  3. Greenfield Investment: This type of investment involves investing in developing new facilities or expanding the existing ones. This is one of the important method of FDI in developing economics.
  4. Mergers and Acquisition: This type of FDI occurs when the assets of a local firm are acquired.

Benefits of Foreign Direct Investment

  • Availability of Scarce Factors of Production.
  • Improvement in the Balance of Payment.
  • Industrial Activity.
  • Employment Generation.
  • Some what economical growth in the nation.

Foreign Investment

A firm requires foreign capital and technology for expanding its operations in international markets. This may be achieved with the help of foreign investment. Thus, foreign investment can directly or indirectly helps in earning foreign capital.

Foreign investment is made by a nation in exchange of assets and assets and securities of a company that is based on another nation. This type of investment facilitates diversification and promotes economic growth. Various instruments can be used to invest in international markets, like through exchange trade funds, American Depository Receipts (ADRs), mutual funds,etc. Majority of investors prefer engaged in foreign investment by investing their capital in foreign market.

Categories of Foreign Investment

  1. Foreign Direct Investment (FDI): It pertains to international investment in which the investor obtains a lasting interest in an enterprise in another country. Most concretely, it may take the form of buying or constructing a factory in a foreign country or adding improvements to such a facility, in the form of property, plants, or equipment.
  2. Global/ Foreign Portfolio Investment (FPI/FII): It is a category of investment instrument that is more easily traded,may be less permanent, and do not represent a controlling stake in an enterprises. These include investments via equity instruments (stocks) or debt of a foreign enterprise which does not necessarily represent a long-term interest.