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This article is about economics. For the magazine, see FDi magazine. Foreign direct investment (FDI) is defined as "investment made to acquire lasting interest in enterprises operating outside of the economy of the investor."[1] The FDI relationship consists of a parent enterprise and a foreign affiliate which together form a Multinational corporation (MNC). In order to qualify as FDI the investment must afford the parent enterprise control over its foreign affiliate. The UN 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. Image File history File links This is a lossless scalable vector image. ...
Invest redirects here. ...
This article is about the United Nations, for other uses of UN see UN (disambiguation) Official languages English, French, Spanish, Russian, Chinese, Arabic Secretary-General Kofi Annan (since 1997) Established October 24, 1945 Member states 191 Headquarters New York City, NY, USA Official site http://www. ...
Incorporation (abbreviated Inc. ...
Portfolio investments represent passive holdings of securities such as foreign stocks, bonds, or other financial assets, none of which entails active management or control of the securities issuer by the investor. ...
History
In the years after the Second World War global FDI was dominated by the United States, as much of the world recovered from the destruction brought by the conflict. The US accounted for around three-quarters of new FDI (including reinvested profits) between 1945 and 1960. Since that time FDI has spread to become a truly global phenomenon, no longer the exclusive preserve of OECD countries. FDI has grown in importance in the global economy with FDI stocks now constituting over 20 percent of global GDP.[citation needed] The Organization for Economic Co-operation and Development (OECD) is an international organization of those developed countries that accept the principles of representative democracy and a free market economy. ...
Types of FDI
By Direction
Inward Inward foreign direct investment is a particular form of inward investment when foreign capital is invested in local resources. ...
Inward FDI is encouraged by:
- Tax breaks, subsidies, low interest loans, grants, lifting of certain restrictions
- The thought is that the long term gain is worth more than the short term loss of income
Inward FDI is restricted by: - Ownership restraints or limits
- Differential performance requirements
Outward Outward foreign direct investment, sometimes called "direct investment abroad", is when local capital is invested in foreign resources. Yet it can also be used to invest in imports and exports from a foreign commodity country.
Outward FDI is encouraged by:
- Government-backed insurance to cover risk
Outward FDI is restricted by: - Tax incentives or disincentives on firms that invest outside of the home country or on repatriated profits
- Subsidies for local businesses
- Leftist government policies that support the nationalization of industries (or at least a modicum of government control)
- Self-interested lobby groups and societal sectors who are supported by inward FDI or state investment, for example labour markets and agriculture.
- Security industries are often kept safe from outwards FDI to ensure localised state control of the military industrial complex
By Target
Greenfield investment -
Direct investment in new facilities or the expansion of existing facilities. Greenfield investments are the primary target of a host nation’s promotional efforts because they create new production capacity and jobs, transfer technology and know-how, and can lead to linkages to the global marketplace. The Organization for International Investment cites the benefits of greenfield investment (or insourcing) for regional and national economies to include increased employment (often at higher wages than domestic firms); investments in research and development; and additional capital investments. Criticism of the efficiencies obtained from greenfield investments include the loss of market share for competing domestic firms. Another criticism of greenfield investment is that profits are perceived to bypass local economies, and instead flow back entirely to the multinational's home economy. Critics contrast this to local industries whose profits are seen to flow back entirely into the domestic economy. Wikipedia does not have an article with this exact name. ...
Mergers and Acquisitions -
Transfers of existing assets from local firms to foreign firms takes place; the primary type of FDI. Cross-border mergers occur when the assets and operation of firms from different countries are combined to establish a new legal entity. Cross-border acquisitions occur when the control of assets and operations is transferred from a local to a foreign company, with the local company becoming an affiliate of the foreign company. Unlike greenfield investment, acquisitions provide no long term benefits to the local economy-- even in most deals the owners of the local firm are paid in stock from the acquiring firm, meaning that the money from the sale could never reach the local economy. Nevertheless, mergers and acquisitions are a significant form of FDI and until around 1997, accounted for nearly 90% of the FDI flow into the United States. Mergers are the most common way for multinationals to do FDI. Acquisition redirects here. ...
Horizontal FDI Horizontal FDI occurs when the multinational undertakes the same production to activities in multiple countries.
Vertical FDI
Backward Vertical FDI Where an industry abroad provides inputs for a firm's domestic productions.
Forward Vertical FDI Where an industry abroad sells the outputs of a firm's domestic production.
By Motive FDI can also be categorized based on the motive behind the investment from the perspective of the investing firm:
Resource-Seeking Investments which seek to acquire factors of production that are more efficient than those obtainable in the home economy of the firm. In some cases, these resources may not be available in the home economy at all (e.g. cheap labor and natural resources). This typifies FDI into developing countries, for example seeking natural resources in the Middle East and Africa, or cheap labor in Southeast Asia and Eastern Europe.
Market-Seeking Investments which aim at either penetrating new markets or maintaining existing ones. FDI of this kind may also be employed as defensive strategy;[2] it is argued that businesses are more likely to be pushed towards this type of investment out of fear of losing a market rather than discovering a new one.[3] This type of FDI can be characterized by the foreign Mergers and Acquisitions in the 1980’s by Accounting, Advertising and Law firms.[4] Acquisition redirects here. ...
Efficiency-Seeking Investments which firms hope will increase their efficiency by exploiting the benefits of economies of scale and scope, and also those of common ownership. It is suggested that this type of FDI comes after either resource or market seeking investments have been realized, with the expectation that it further increases the profitability of the firm.[3]. The increase in output from Q to Q2 causes a decrease in the average cost of each unit from C to C1. ...
Economies of scope are conceptually similar to economies of scale. ...
Strategic-Asset-Seeking A tactical investment to prevent the gain of resource to a competitor. Easily compared to that of the oil producers, whom may not need the oil at present, but look to prevent their competitors from having it.
Opposition In the US, in the late 1960s and early 1970s, foreign direct investment became increasingly politicized. Organized labor, convinced that foreign investment exported jobs, undertook a major campaign to reform the tax provisions which affected foreign direct investment. The Foreign Trade and Investment Act of 1973 (or the Burke-Hartke Bill) would have eliminated both the tax credit and tax deferral. The Nixon Administration, influential members of Congress of both parties, and well-financed lobbying organizations came to the defense of the multinational. The massive counterattack of the multinational corporations and their allies defeated this first major challenge to their interests.[5] A union (labor union in American English; trade union, sometimes trades union, in British English; either labour union or trade union in Canadian English) is a group of workers who act collectively to address common issues. ...
See also A countrys international investment position is the result of its financial account in the balance of payments. ...
A Bilateral Investment Treaty (BIT) is an agreement establishing the terms and conditions for private investment by nationals and companies of one state in the state of the other. ...
This article or section does not cite its references or sources. ...
The Multilateral Investment Guarantee Agency (MIGA) is a member of the World Bank group. ...
The International Centre for Settlement of Investment Disputes (ICSID), an institution of the World Bank group, was founded in 1966 under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States. ...
Foreign affiliate trade statistics (FATS) Statistics, also known as transnational corporation data details the operations of foreign direct investment-based enterprises, including sales, expenditures, profits, value-added, inter- and intra-firm trade, exports and imports; An economic indicator for Mode 3 of the GATS Four Modes of Supply See Also...
The World Association of Investment Promotion Agencies, or WAIPA, is an international NGO hosted by UNCTAD that acts as a forum for investment promotion agencies, provides networking and promotes best practice in investment promotion. ...
References - ^ Foreign Direct Investment, United Nations Conference on Trade and Devolpment, www.unctad.org
- ^ Knickerbocker identified this phenomenon in his ‘follow-my-leader’ hypothesis in: Knickerbocker, F. T. (1973). Oligopolistic reaction and multinational enterprise. Boston(Mass.), Division of Research Graduate School of Business Administration Harvard University.
- ^ a b Dunning, J. H. (1993). Multinational enterprises and the global economy. Wokingham, England ; Reading, Mass, Addison-Wesley
- ^ Dunning, J. H., B. Kogut and M. Blomstrom (1990). Globalization of firms and the competitiveness of nations. Lund, Institute of Economic Research Lund University ; Bromley : Chartwell-Bratt c1990
- ^ Gilpin, R. (1986) U.S. Power and the Multinational Corporation- The Political Economy of Foreign Direct Investment. New York: Basica Books, Inc., Publishers
External links - FDI.net - foreign direct investment information portal of the World Bank Group
- OECD work on international investment
- World Investment Report (UNCTAD)
- UNECE Database with Historical Trade data
- FDI: A lead driver for Sustainable Development? (Earth Summit 2002)
- Organization for International Investment
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