A Foreign Direct Investment (FDI) is an instance of the investment of assets (capital or other) by an investor in any new establishment located in any country other than the country of the investor, in order to acquire a lasting or long-term management interest in or control over the business of the newly-formed entity (receiving investment). According to The Organization of Economic Cooperation and Development (OECD), for achieving such a management interest or control, the investor must own at least 10% or more of the voting stock or ordinary shares of the entity gaining foreign investment. Again, the investor can be an individual person, or an association of persons, or a company (multinational corporation), or even a group of companies. The investment buying ownership of less than 10% voting stock or ordinary shares, is generally termed as the Portfolio Investment, and is not categorized as an FDI. Again, the foreign investments in the stock markets are not recognized as FDI. Lastly, the investing entity may carry out the FDI in a variety of ways. The most common and popular ways are setting up a wholly-owned subsidiary or associate company in the targeted foreign country, or by acquiring shares of an overseas company, or by expanding operations of an existing native business, or through a M&A or joint venture. Thus, in the narrowest sense, the FDI is funding a new business entity in any foreign country.
Broadly, the total magnitude of the foreign direct investments received by the companies and firms active in various economic fields of a country (say India) from all foreign investors in any financial year, is regarded as the total FDI acquired by India in the specified year. FDIs to any country support economic development and growth of the country, through helping in generation of new employments, sources of revenue, and horizons for development in the recipient country.
Foreign Direct Investment Advantages
The above section elucidated on 'what is foreign direct investment?'. And now, this section is going to enumerate the advantages of FDI to both the investors and the entities and countries receiving this.
Comprehensively, the FDI offers certain advantages to the recipient company and country, and may also provide some disadvantages to the country receiving FDI. To the investor company, FDI is generally very profitable. Here, only the fdi advantages both to the investor and the recipient entity and country are described below.
Advantages of FDI to the Investing EntityTo the investor, FDI gives the following main and very significant benefits:
- An accepted, exclusive, and effective means/opportunity for entering into the fast progressing foreign markets and international/global business.
- Access to new marketing channels, new technology and expertise, and diversification of products/services.
- Reduced costs of production, resulted by cheaper workforce, materials, etc. For example, shoe and clothing industries generally prefer to moving their operation to the developing countries, in order to reduce the total cost of production drastically.
- Easy and economical access to precious resources --- FDI can also be a very elegant and effective means for obtaining easy and cheaper access to certain precious natural resources of investor’s use or benefit, such as precious metals, fossil fuels, oil and gas, etc.
Advantages of FDI to the Recipient Entity and Country
In general, companies and firms receiving FDI gain the following major and magnificent advantages --- external capital and other necessary resources for better profitability and growth, increased employment potentials, access to new technologies and business practices, new management techniques and economic concepts, and ideas for developing new industries and markets. Thus, the most notable advantages of FDI to the recipient country are availability of foreign funds for industrial and economic development and growth, increased job opportunities in the country, enhanced exports and tax revenues, improved forex position of the country, transfer of new profitable technology, new managerial and commercial techniques and practices, better efficiencies and productivities, and new horizons for industrial and economic development.