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A foreign direct investment (FDI) is an investment in the form of a controlling ownership in a business in one country by an entity based in another country. It is thus distinguished from a foreign portfolio investment by a notion of direct control. The origin of the investment does not impact the definition, as an FDI: the investment may be made either "inorganically" by buying a company in the target country or "organically" by expanding the operations of an existing business in that country.


Definitions

Broadly, foreign direct investment includes "mergers and acquisitions, building new facilities, reinvesting profits earned from overseas operations, and intra company loans". In a narrow sense, foreign direct investment refers just to building new facility, and a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor. FDI is the sum of equity capital, long-term capital, and short-term capital as shown in the balance of payments. FDI usually involves participation in management,
joint-venture A joint venture (JV) is a business entity created by two or more parties, generally characterized by shared ownership, shared returns and risks, and shared governance. Companies typically pursue joint ventures for one of four reasons: to acce ...
, transfer of technology and expertise. ''Stock'' of FDI is the ''net'' (i.e., outward FDI minus inward FDI) cumulative FDI for any given period. Direct investment excludes investment through purchase of shares (if that purchase results in an investor controlling less than 10% of the shares of the company). FDI, a subset of
international factor movements In international economics, international factor movements are movements of labor, capital, and other factors of production between countries. International factor movements occur in three ways: immigration/emigration, capital transfers through in ...
, is characterized by controlling ownership of a business enterprise in one country by an entity based in another country. Foreign direct investment is distinguished from foreign portfolio investment, a passive investment in the securities of another country such as public stocks and bonds, by the element of "control". According to the ''
Financial Times The ''Financial Times'' (''FT'') is a British daily newspaper printed in broadsheet and published digitally that focuses on business and economic current affairs. Based in London, England, the paper is owned by a Japanese holding company, Ni ...
'', "Standard definitions of control use the internationally agreed 10 percent threshold of voting shares, but this is a grey area as often a smaller block of shares will give control in widely held companies. Moreover, control of technology, management, even crucial inputs can confer de facto control."


Theoretical background

According to Grazia Ietto-Gillies (2012), prior to Stephen Hymer's theory regarding direct investment in the 1960s, the reasons behind foreign direct investment and multinational corporations were explained by
neoclassical economics Neoclassical economics is an approach to economics in which the production, consumption and valuation (pricing) of goods and services are observed as driven by the supply and demand model. According to this line of thought, the value of a good ...
based on macro economic principles. These theories were based on the classical theory of trade in which the motive behind trade was a result of the difference in the costs of production of goods between two countries, focusing on the low cost of production as a motive for a firm's foreign activity. For example, Joe S. Bain only explained the internationalization challenge through three main principles: absolute cost advantages,
product differentiation In economics and marketing, product differentiation (or simply differentiation) is the process of distinguishing a product or service from others to make it more attractive to a particular target market. This involves differentiating it from co ...
advantages and
economies of scale In microeconomics, economies of scale are the cost advantages that enterprises obtain due to their scale of operation, and are typically measured by the amount of output produced per unit of time. A decrease in cost per unit of output enables ...
. Furthermore, the neoclassical theories were created under the assumption of the existence of perfect competition. Intrigued by the motivations behind large foreign investments made by corporations from the United States of America, Hymer developed a framework that went beyond the existing theories, explaining why this phenomenon occurred, since he considered that the previously mentioned theories could not explain foreign investment and its motivations. Facing the challenges of his predecessors, Hymer focused his theory on filling the gaps regarding international investment. The theory proposed by the author approaches international investment from a different and more firm-specific point of view. As opposed to traditional macroeconomics-based theories of investment, Hymer states that there is a difference between mere capital investment, otherwise known as portfolio investment, and direct investment. The difference between the two, which will become the cornerstone of his whole theoretical framework, is the issue of control, meaning that with direct investment firms are able to obtain a greater level of control than with portfolio investment. Furthermore, Hymer proceeds to criticize the neoclassical theories, stating that the theory of capital movements cannot explain international production. Moreover, he clarifies that FDI is not necessarily a movement of funds from a home country to a host country, and that it is concentrated on particular industries within many countries. In contrast, if interest rates were the main motive for international investment, FDI would include many industries within fewer countries. Another observation made by Hymer went against what was maintained by the neoclassical theories: foreign direct investment is not limited to investment of excess profits abroad. In fact, foreign direct investment can be financed through loans obtained in the host country, payments in exchange for equity (patents, technology, machinery etc.), and other methods. The main determinants of FDI is side as well as growth prospectus of the economy of the country when FDI is made. Hymer proposed some more determinants of FDI due to criticisms, along with assuming market and imperfections. These are as follows: # Firm-specific advantages: Once domestic investment was exhausted, a firm could exploit its advantages linked to market imperfections, which could provide the firm with market power and competitive advantage. Further studies attempted to explain how firms could monetize these advantages in the form of licenses. # Removal of conflicts: conflict arises if a firm is already operating in foreign market or looking to expand its operations within the same market. He proposes that the solution for this hurdle arose in the form of collusion, sharing the market with rivals or attempting to acquire a direct control of production. However, it must be taken into account that a reduction in conflict through acquisition of control of operations will increase the market imperfections. # Propensity to formulate an internationalization strategy to mitigate risk: According to his position, firms are characterized with 3 levels of decision making: the day to day supervision, management decision coordination and long-term strategy planning and decision making. The extent to which a company can mitigate risk depends on how well a firm can formulate an internationalization strategy taking these levels of decision into account. Hymer's importance in the field of international business and foreign direct investment stems from him being the first to theorize about the existence of multinational enterprises (MNE) and the reasons behind FDI beyond macroeconomic principles, his influence on later scholars and theories in international business, such as the OLI (''ownership, location and internationalization'') theory by John Dunning and Christos Pitelis which focuses more on transaction costs. Moreover, "the efficiency-value creation component of FDI and MNE activity was further strengthened by two other major scholarly developments in the 1990s: the resource-based (RBV) and evolutionary theories" In addition, some of his predictions later materialized, for example the power of supranational bodies such as IMF or the World Bank that increases inequalities (Dunning & Piletis, 2008). A phenomenon the United Nations Sustainable Development Goal 10 aims to address.


Types of FDI

# Horizontal FDI arises when a firm duplicates its home country-based activities at the same value chain stage in a host country through FDI. # Platform FDI Foreign direct investment from a source country into a destination country for the purpose of exporting to a third country. # Vertical FDI takes place when a firm through FDI moves upstream or downstream in different value chains i.e., when firms perform value-adding activities stage by stage in a vertical fashion in a host country.


Methods

The foreign direct investor may acquire voting power of an enterprise in an economy through any of the following methods: * by incorporating a wholly owned subsidiary or company anywhere * by acquiring shares in an associated enterprise * through a merger or an acquisition of an unrelated enterprise * participating in an equity
joint venture A joint venture (JV) is a business entity created by two or more parties, generally characterized by shared ownership, shared returns and economic risk, risks, and shared governance. Companies typically pursue joint ventures for one of four rea ...
with another investor or enterprise


Forms of FDI incentives

Foreign direct investment incentives may take the following forms: * low corporate tax and individual
income tax An income tax is a tax imposed on individuals or entities (taxpayers) in respect of the income or profits earned by them (commonly called taxable income). Income tax generally is computed as the product of a tax rate times the taxable income. Tax ...
rates *
tax holiday A tax holiday is a temporary reduction or elimination of a tax. It is synonymous with tax abatement, tax subsidy or tax reduction. Governments usually create tax holidays as incentives for business investment. Tax relief can be provided in th ...
s * other types of tax concessions * preferential
tariffs A tariff is a tax imposed by the government of a country or by a supranational union on imports or exports of goods. Besides being a source of revenue for the government, import duties can also be a form of regulation of foreign trade and po ...
*
special economic zone A special economic zone (SEZ) is an area in which the business and trade laws are different from the rest of the country. SEZs are located within a country's national borders, and their aims include increasing trade balance, employment, increas ...
s * EPZ – export processing zones *
bonded warehouse A bonded warehouse, or bond, is a building or other secured area in which dutiable goods may be stored, manipulated, or undergo manufacturing operations without payment of duty. It may be managed by the state or by private enterprise. In the ...
s * maquiladoras * investment financial subsidies * free land or land subsidies * relocation & expatriation * infrastructure subsidies * R&D support * energy * derogation from regulations (usually for very large projects)


FDI

FDI flows are more likely to go countries with democratic institutions. A 2010
meta-analysis A meta-analysis is a statistical analysis that combines the results of multiple scientific studies. Meta-analyses can be performed when there are multiple scientific studies addressing the same question, with each individual study reporting me ...
of the effects of foreign direct investment (FDI) on local firms in developing and transition countries suggests that foreign investment robustly increases local productivity growth.


Europe

According to a study conducted by EY, France was in 2020 the largest foreign direct investment recipient in Europe, ahead of the UK and Germany.How can Europe reset the investment agenda now to rebuild its future?
EY, 28 May 2020
EY attributed this as a "direct result of President Macron's reforms of labor laws and corporate taxation, which were well received by domestic and international investors alike." Moreover, 24 countries of the EU made an investment into Armenian economy since the year of Armenian Independence.


China

FDI in China, also known as RFDI (renminbi foreign direct investment), has increased considerably in the last decade, reaching $19.1 billion in the first six months of 2012, making China the largest recipient of foreign direct investment at that point of time and topping the
United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territori ...
which had $17.4 billion of FDI. In 2013 the FDI flow into China was $24.1 billion, resulting in a 34.7% market share of FDI into the Asia-Pacific region. By contrast, FDI out of China in 2013 was $8.97 billion, 10.7% of the Asia-Pacific share. During the
global financial crisis Global means of or referring to a globe and may also refer to: Entertainment * ''Global'' (Paul van Dyk album), 2003 * ''Global'' (Bunji Garlin album), 2007 * ''Global'' (Humanoid album), 1989 * ''Global'' (Todd Rundgren album), 2015 * Bruno ...
FDI fell by over one-third in 2009 but rebounded in 2010. China implemented the Foreign Investment Law in 2020.


India

Foreign investment was introduced in 1991 under Foreign Exchange Management Act (FEMA), driven by then finance minister Manmohan Singh. India disallowed overseas corporate bodies (OCB) to invest in India. India imposes cap on equity holding by foreign investors in various sectors, current FDI in aviation and insurance sectors is limited to a maximum of 49%. A 2012
UNCTAD The United Nations Conference on Trade and Development (UNCTAD) is an intergovernmental organization within the United Nations Secretariat that promotes the interests of developing countries in world trade. It was established in 1964 by the ...
survey projected India as the second most important FDI destination (after China) for transnational corporations during 2010–2012. As per the data, the sectors that attracted higher inflows were services, telecommunication, construction activities and computer software and hardware. Mauritius, Singapore, US and UK were among the leading sources of FDI. Based on UNCTAD data FDI flows were $10.4 billion, a drop of 43% from the first half of the last year. In 2015, India emerged as top FDI destination surpassing China and the US. India attracted FDI of $31 billion compared to $28 billion and $27 billion of China and the US respectively.


United States

Broadly speaking, the United States has a fundamentally "
open economy An open economy is a type of economy where not only domestic factors but also entities in other countries engage in trade of products (goods and services). Trade can take the form of managerial exchange, technology transfers, and all kinds of goo ...
" and low barriers to the FDI. U.S. FDI totaled $194 billion in 2010. Of FDI in the United States in 2010, 84% came from or through eight countries: Switzerland, the United Kingdom, Japan, France, Germany, Luxembourg, the Netherlands, and Canada. A major source of investment is real estate; the foreign investment in this area totaled $92.2 billion in 2013, under various forms of purchase structures (considering the U.S. taxation and residency laws). A 2008 study by the
Federal Reserve Bank of San Francisco The Federal Reserve Bank of San Francisco (informally referred to as the San Francisco Fed) is the federal bank for the twelfth district in the United States. The twelfth district is made up of nine western states—Alaska, Arizona, California, ...
indicated that foreigners hold greater shares of their investment portfolios in the United States if their own countries have less developed financial markets, an effect whose magnitude decreases with income per capita. Countries with fewer capital controls and greater trade with the United States also invest more in U.S. equity and bond markets.
White House The White House is the official residence and workplace of the president of the United States. It is located at 1600 Pennsylvania Avenue NW in Washington, D.C., and has been the residence of every U.S. president since John Adams in ...
data reported in 2011 found that a total of 5.7 million workers were employed at facilities highly dependent on foreign direct investors. Thus, about 13% of the American manufacturing workforce depended on such investments. The average pay of said jobs was found as around $70,000 per worker, over 30% higher than the average pay across the entire U.S. workforce. President
Barack Obama Barack Hussein Obama II ( ; born August 4, 1961) is an American politician who served as the 44th president of the United States from 2009 to 2017. A member of the Democratic Party, Obama was the first African-American president of the ...
said in 2012, "In a global economy, the United States faces increasing competition for the jobs and industries of the future. Taking steps to ensure that we remain the destination of choice for investors around the world will help us win that competition and bring prosperity to our people." In September 2013, the
United States House of Representatives The United States House of Representatives, often referred to as the House of Representatives, the U.S. House, or simply the House, is the lower chamber of the United States Congress, with the Senate being the upper chamber. Together they ...
voted to pass the Global Investment in American Jobs Act of 2013 (H.R. 2052; 113th Congress), a bill which would direct the
United States Department of Commerce The United States Department of Commerce is an executive department of the U.S. federal government concerned with creating the conditions for economic growth and opportunity. Among its tasks are gathering economic and demographic data for bus ...
to "conduct a review of the global competitiveness of the United States in attracting foreign direct investment". Supporters of the bill argued that increased foreign direct investment would help job creation in the United States.


Eurasia

In November 2021, a report from the Eurasian Development Bank revealed that Kazakhstan boasted the highest FDI stock value from the Eurasian Economic Union (EAEU) with $11.2 billion by 2020 and an increase of over $3 billion since 2017.


Armenia

According to the World Bank, Armenia takes the first place in terms of FDI appeal among Commonwealth of Independent States. The Armenian government has created a favorable environment for foreign investments by introducing new laws and conditions. The country was named ‘The Caucasian Tiger’ because of its dynamic economy. Some of the measures to attract FDI include free economic zones (FEZ) with relaxed laws, also, profit tax, VAT, and property tax benefits. In particular, The Most Favored Nation (MFN) and National Treatment regimes are in effect, and the government has chosen a "open door" policy with ongoing legal protection to encourage international investment. A highly beneficial business environment is guaranteed for international investors under the law "On Foreign Investments." Additionally, it guarantees the protection of foreign capital invested in Armenian businesses and permits limitless involvement. Research shows that Cyprus, Germany, Netherlands, UK, and France have made an altogether investment in an amount 1.4 USD billion in the period 2007-2013.


See also

*
Bilateral investment treaty A bilateral investment treaty (BIT) is an agreement establishing the terms and conditions for private investment by nationals and companies of one state in another state. This type of investment is called foreign direct investment (FDI). BITs ar ...
* Foreign direct investment and the environment * Foreign exchange controls *
Investment promotion agency An investment promotion agency (IPA) is most often a government agency (or occasionally a non-profit organization functioning similar to a chamber of commerce or business consulting corporation) whose mission is to attract investment to a country, s ...
*
List of countries by FDI abroad This is the list of countries by stock of Foreign direct investment (FDI) abroad, that is the cumulative US dollar value of all investments in foreign countries made directly by residents - primarily companies - of the home country, as of the end o ...
*
List of countries by received FDI This article includes a list of countries of the world sorted by received foreign direct investment (FDI) stock, the level of accumulated FDI in a country. The US dollar estimates presented here are calculated at market or government official exc ...
* Foreign ownership


References


External links

*
Foreign Direct Investment in the United States. Transactions.

Foreign Direct Investment in the United States
Department of Commerce and Council of Economic Advisers
Interactive Historical Data: Foreign Direct Investment in the United States — Flow
Federal Reserve Board of Governors The Board of Governors of the Federal Reserve System, commonly known as the Federal Reserve Board, is the main governing body of the Federal Reserve System. It is charged with overseeing the Federal Reserve Banks and with helping implement the m ...

OECD Benchmark Definition of Foreign Direct Investment (2008)

IMF: How Countries Measure FDI (2001)
{{Authority control Economic geography International business International factor movements International macroeconomics