Foreign Direct Investment
Foreign direct investment (FDI) is whereby a country acquires or sets up businesses, and tangible assets, including shares in other countries, mainly through private investors or corporations. As a result of this, the investor is able to gain control of the business operations and organization of investments in a foreign country. With such an authority, the multinationals are also entitled to the larger cut of the profits, most of which will go their respective countries.
Those who support FDI argue that it ensures the benefit of both parties, multinationals and developing economies. However, opponents claim that it offers an opportunity for larger corporations to command greater power over companies in poor economies, thereby hindering competition in local markets.
At times, many people confuse FDI with portfolio foreign investment. It should be noted that portfolio foreign investment refers to the purchase of the securities of a particular country by citizens of another. Another difference between the two is determined by the aspect of control. FDI does not only involve the exchange of ownership but also extends to elements complimentary to capital, like technology, management and organization expertise.
How to determine Foreign Direct Investment
According to the above definition, FDI generally refers to the act of a company or an individual of a given economy having significant influence or control of enterprises in foreign country. However, it is important to always specify the level of influence that the investor should command.
The World Bank, points out that the threshold of foreign direct investment requires ownership of 10% or more of the ordinary shares of voting stock. The shares can be acquired by an organization or individuals with interests in foreign investments.
How Foreign Direct Investment is conducted
Overseas investments can be done in several ways, based on the prevailing market conditions, availability of opportunities and labor, government regulations among other factors. The following are some of the ways through which companies can conduct investments in foreign countries.
Subsidiaries
Bigger companies with interests in foreign investments can choose to acquire shares from those based in the respective countries. In most cases, the companies are usually related with regards to products they offer, their manufacturing processes or services. The investing company, however, needs to acquire more than 50% of the subsidiary.
Mergers
Joint ventures can also be another way of conducting FDI. A merger is whereby two or more companies dealing in similar products and services come together to work under an umbrella. In the event that companies form a merger, decisions are always made collectively, however, the number of shares held by each may also determine who has more control or influence over another.
Direct acquisition
In countries with weak economies, some businesses find it hard to flourish and are eventually put up on sale. If the businesses present some potential, a conglomerate in a foreign country may come in and buy one or more of them. Although the business will remain in the host country, its processes, management and other key functions will be controlled by the investor.
Companies can also make direct investments in foreign countries through licensing of intellectual property rights, construction of facilities, supply of technology and equipment, internalization of processes, among other avenues.
A case study of FDI can be an example of a Canadian company teaming up with other smaller companies in Chile to pursue mineral deposits. Another scenario is whereby American companies are acquiring stakes in Chinese companies in order to facilitate manufacturing, sales among other goals.
Since foreign direct investment encourages business between countries, it has been instrumental in the internalization of trade. Through the relationships outlined above, several business opportunities are created, both to the investor and host.
The development of new technology and information systems, availability of cheap labor, reduction in costs of communication across the globe have made it easier for FDI to thrive.
Conclusion on Foreign Direct Investment
Foreign direct investment generally encourages international trade, which is one of the key indicators of economic growth. However, there are certain factors that investors will have to critically look into before investing in foreign countries, in order to identify the right avenues with opportunities for mutual growth and development. Government regulations, profitability are among the key factors that should be considered.
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References
http://lexicon.ft.com/Term?term=foreign-direct-investment
http://data.worldbank.org/indicator/BX.KLT.DINV.CD.WD
http://www.investopedia.com/terms/f/fdi.asp
http://www.going-global.com/articles/understanding_foreign_direct_investment.htm