What Is Foreign Direct Investment Explain Its Forms

Foreign direct investment can be made in a variety of ways, including opening a foreign subsidiary or partner, acquiring a majority stake in an existing foreign company, or through a merger or joint venture with a foreign company. Platform: A company expands to a foreign country, but the production of foreign operations is exported to a third country. This is also called the FDI export platform. Platform FDI often takes place in low-cost locations in free trade zones. For example, if Ford bought production facilities in Ireland for the main purpose of exporting cars to other EU countries. However, the definition is slightly different when it comes to investing in assets of a foreign company. According to the IMF, a foreign direct investment is the case, in which the investor acquires more than 10% of the company`s shares. Foreign direct investment offers benefits to both the investor and the foreign host country. These incentives encourage both sides to participate in and authorize foreign direct investment.

A vertical investment is an investment in which various but related business activities are established or acquired from the investor`s main activity in a foreign country. B, for example, when a manufacturing enterprise acquires a stake in a foreign company that supplies parts or raw materials necessary for the manufacturing enterprise to manufacture its products. Foreign direct investment in mainland China remained stable in 2015 despite the economic slowdown in the world`s second-largest economy. Foreign direct investment, which excludes investment in the financial sector, rose 6.4 percent year-on-year to $126.27 billion in 2015. [32] Vertical foreign direct investment is another type of foreign investment. Vertical foreign direct investment occurs when an investment is made within a typical supply chain in a company that may or may not necessarily belong to the same industry. Thus, when vertical foreign direct investment takes place, a company invests in a foreign company that can supply or sell products. Vertical IDs are further classified as upstream vertical integrations and downstream vertical integrations. For example, the Swiss coffee producer Nescafe can invest in coffee plantations in countries such as Brazil, Colombia, Vietnam, etc.

Since the investing company buys a supplier in the supply chain, this type of FDI is called retrospective vertical integration. Conversely, vertical integration is said to occur when a company invests in another foreign company that is ranked higher in the supply chain, e.B. a coffee company in India may want to invest in a French food brand. The foreign direct investor can acquire the voting rights of a company in an economy through one of the following methods: Foreign direct investment promotes international trade because it allows production to flow to more profitable parts of the world. For example, Apple has been able to make foreign direct investments in China to help manufacture its products. According to Grazia Ietto-Gillies (2012)[12], before Stephen Hymer`s direct investment theory in the 1960s, the reasons for foreign direct investment and multinational enterprises were explained by a neoclassical economy based on macroeconomic principles. These theories were based on the classical theory of trade, in which the motive behind trade was the result of the different production costs of goods between two countries and focused on the low cost of production as the motive for a firm`s foreign activity. For example, Joe S. Bain explained the challenge of internationalization using only three main principles: absolute cost benefits, product differentiation benefits, and economies of scale. In addition, neoclassical theories were created under the assumption of the existence of perfect competition. Intrigued by the motivations behind the large foreign investments of US companies, Hymer developed a framework that went beyond existing theories and explained why this phenomenon occurred, believing that the aforementioned theories could not explain foreign investment and its motivations.

A type of conglomerate foreign direct investment is an investment in which a firm or individual makes a foreign investment in an enterprise that is not related to its existing activities in its home country. Since this type of investment involves entering an industry in which the investor has no previous experience, it often takes the form of a joint venture with a foreign company that already operates in the industry. Foreign direct investment is typically made in open economies that offer a skilled workforce and above-average growth prospects for the investor, as opposed to tightly regulated economies. Foreign direct investment often involves more than just capital investment. It may also include management or technology provisions. The main feature of foreign direct investment is that it establishes either effective control or at least significant influence over the decision-making of a foreign enterprise. In 2014[58], President Putin announced that Russian investment abroad would flow legally, would no longer be controlled by the tax or legal sector. It is Putin`s favorable policy to call on Russian investments to return. The most common type of foreign direct investment is horizontal direct investment, which consists mainly of investing funds in a foreign company belonging to the same sector as that of the FDI investor.

Here, a company invests in another company based in another country, with both companies producing similar goods. For example, the Spanish company Zara can invest or buy the Indian company Fab India, which also manufactures products similar to Zara. Since both companies belong to the same commodity and apparel industry, FDI is classified as horizontal FDI. Let`s see why and how companies invest in foreign markets. Simply buying goods and services or deciding to invest in a local market depends on the needs and overall strategy of the company. Direct investment in a country occurs when a company decides to build facilities to manufacture or market its products; or seeks a partnership with, invests or buys a local business to take control of and access the local market, production or resources. Many considerations influence its decisions: in 1999,[57] Russia announced a law called the “FDI of the Russian Federation”, which aimed to provide foreign investors with a basic guarantee of investment, current affairs and profits. The origin of the investment does not affect the definition of FDI: the investment can be made either “inorganically” by buying a company in the target country, or “organically” by developing the business activities of an existing enterprise in that country. Incentives for foreign direct investment can take the following forms:[17] Overall, foreign direct investment includes “mergers and acquisitions, construction of new facilities, reinvestment of profits from overseas transactions, and intra-group loans.” Strictly speaking, foreign direct investment refers only to the construction of new facilities and a permanent management stake (10% or more of the voting shares) in a company operating in an economy other than that of the investor. [10] Foreign direct investment is the sum of equity, long-term capital and short-term capital, as reported in the balance of payments.




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