What Is Foreign Direct Investment (FDI)?

Foreign direct 💛investment (FDI) refers to an ownership stake in a fore𒅌ign company or project made by an investor, company, or government from another country. FDI is generally used to describe a business decision to acquire a substantial stake in a foreign business or to buy it outright to expand operations to a new region.

The term usually isn't used to describe just a stock investment in a foreign company. FDI is a key element in international economic integration because it creates stable and long-lasting links between economies.

How Foreign Direct Investment (FDI) Works

Foreign direct investment is a stake in a company or project by a foreign entity. Companies or governments considering an FDI generally consider 澳洲幸运5官方开奖结果体彩网:target firms or projects in open economies 🐲that offer a skꦇilled workforce and above-average growth prospects for the investor. Light government regulation also tends to be prized.

FDI frequently goes beyond mere 澳洲幸运5官方开奖结果体彩网:capital investment. It may also includ♏e the provision of management, tech♏nology, and equipment. A key feature of FDI is that it establishes effective control of the foreign business or at least substantial influence over its decision-making.

The net amounts of money involved in FDI are substantial with roughly $1.3 trillion of foreign direct investments made in 2023 and this was a 2% drop from 2022.

FDI inflows as a percentage of 澳洲幸运5官方开奖结果体彩网:gross domestic product (GDP) are a goo🌠d indicator of a nation’s appeal as a long-term investment destination. FDI as a percentage of GDP is often significantly higher for smaller, dynamic econo𝓰mies.

Special Considerations

Foreign direct investments can be made in a variety of ways including opening a subsidiary or 澳洲幸运5官方开奖结果体彩网:associate company in a foreign country, acquiring a controlling interest in an existing foreign company, or using a merger or 澳洲幸运5官方开奖结果体彩网:joint venture with a foreign company.

The threshold for an FDI that establishes a controlling interest is a minimum 10% ownership stake in a foreign-based company per guidelines established by the Organisation for Economic Co-operation and Development (OECD). That de🌸finition is flexible. Effective controlling interest in a firm can be established by acquiring less than 10% of the company’s voting shares.

Types of Foreign Direct Investment

Foreign direct investments are commonly categorized as horizontal, vertical, or conglome💞rate.

• A company establishes the same type of business operation in a foreign country as it operates in its home country with a horizontal FDI. A U.S.-based cellphone provider buying a chain of phone stores in China would be an example. 
• A business acquires a complementary business in another country in a vertical FDI. A U.S. manufacturer might acquire an interest in a foreign company that supplies it with the raw materials it needs.
• A company invests in a foreign business that is unrelated to its core business in a conglomerate FDI. The investing company has no prior experience in the foreign company’s area of expertise so this often takes the form of a joint venture.

Examples of Foreign Direct Investment

Foreign direct investments may involve mergers, 💙acquisitions, or partnerships in retail, services, logistics, or manufacturing. They indicate a multinational strategy for company growth.

They can also run into regulatory concerns. U.S. company Nvidia announced its planned acquisition of ARM, a U.K.-based chip designer, in 2020. The U.K.’s competition watchdog announced an investigation in August 2021 into whether the $40 billion deal would reduce competition in industries reliant on semiconductor chips. The deal was called off in February 2022.

The Bottom Line

FDI involves the direct investment by companies or governments into foreign firms or projects. It accounts for tril🌺lions in cash flows around the world with the U.S. and China leading in the FDI inflow statistics. FDI funds can be a substantial part of the overall GDP for smaller and developing countries.

澳洲幸运5官方开奖结果体彩网:Foreign portfolio investment (FPI) is related to FDI but instead involves owning the securities issued by firms such a꧂s stock in foreign companies rather thꦿan direct capital investments.