Foreign Direct Investment

Foreign direct investment From Wikipedia, the free encyclopedia Jump to: navigation, search This article is about economics. For the magazine, see FDi magazine. Foreign direct investment (FDI) in its classic form is defined as a company from one country making a physical investment into building a factory in another country. It is the establishment of an enterprise by a foreigner. [1] More specifically, Foreign direct investment is a cross-border corporate governance mechanism through which a company obtains productive assets in another country.[2] Its definition can be extended to include investments made to acquire lasting interest in enterprises operating outside of the economy of the investor.[3] The FDI relationship consists of a parent enterprise and a foreign affiliate which together form an international business or a multinational corporation (MNC). In order to qualify as FDI the investment must afford the parent enterprise control over its foreign affiliate. The IMF defines control in this case as owning 10% or more of the ordinary shares or voting power of an incorporated firm or its equivalent for an unincorporated firm; lower ownership shares are known as portfolio investment.[4]

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[edit] History Foreign direct investment (FDI) is a measure of foreign ownership of productive assets, such as factories, mines and land. Increasing foreign investment can be used as one measure of growing economic globalization. Maps below show net inflows of foreign direct investment as a percentage of gross domestic product (GDP). The largest flows of foreign investment occur between the industrialized countries (North America, North West Europe and Japan). But flows to non-industrialized countries are increasing. US International Direct Investment Flows:[5] Period 1960-69 1970-79 1980-89 1990-99 2000-07 Total

FDI Outflow FDI Inflows Net $ 42.18 bn $ 5.13 bn + $ 37.04 bn $ 122.72 bn $ 40.79 bn + $ 81.93 bn $ 206.27 bn $ 329.23 bn - $ 122.96 bn $ 950.47 bn $ 907.34 bn + $ 43.13 bn $ 1,629.05 bn $ 1,421.31 bn + $ 207.74 bn $ 2,950.69 bn $ 2,703.81 bn + $ 246.88 bn

[edit] Type of Foreign Direct Investors

A foreign direct investor may be classified in any sector of the economy and could be any one of the following:[citation needed] • • • • • • • •

an individual; a group of related individuals; an incorporated or unincorporated entity; a public company or private company; a group of related enterprises; a government body; an estate (law), trust or other societal organisation; or any combination of the above.

[edit] Methods of Foreign Direct Investments The foreign direct investor may acquire 10% or more of the voting power of an enterprise in an economy through any of the following methods: • • • •

by incorporating a wholly owned subsidiary or company by acquiring shares in an associated enterprise through a merger or an acquisition of an unrelated enterprise participating in an equity joint venture with another investor or enterprise

Foreign direct investment incentives may take the following forms:[citation needed] • • • • • • • • • • • • •

low corporate tax and income tax rates tax holidays other types of tax concessions preferential tariffs special economic zones investment financial subsidies soft loan or loan guarantees free land or land subsidies relocation & expatriation subsidies job training & employment subsidies infrastructure subsidies R&D support derogation from regulations (usually for very large projects)