Foreign Direct Investment (FDI)

Foreign Direct Investment

Foreign direct investment is defined as a company from one country, which makes a physical investment into constructing a factory in another one. The company can also make investments to acquire lasting interest in enterprises that operate outside the economy it invested in. The link with the FDI is made of a parent enterprise and a foreign affiliate, forming together a corporation, known as multinational.

To qualify as FDI, this investment must also allow and afford the control of the parent enterprise over the foreign affiliate. This kind of control is defined by the UN as owning 10% or more of the shares or voting power of a firm, which is incorporated, or the exact equivalent for an unincorporated one. In this context, ownership shares that are lower are known to be portfolio investment.

Global FDI was dominated by the United States in the postwar period, accounting for about three-quarters of the new FDI, reinvested profits included. Since that time, the 60s, FDI has continued to spread and eventually became a global phenomenon. Global economy now has an ever growing, increasing in importance, with FDI stock constituting over 20 percent of global Gross Domestic Product.

Continuous economic growth, de-regulation, liberal investment rules, as well as operational flexibility have all contributed to help increase the inflow of Foreign Direct Investment. Foreign Direct Investment is made of any form of investment that can earn interest in enterprises functioning outside the investor’s territory.

FDIs also require a relationship between a parent company and its foreign subsidiary. So that an investment can be seen as an FDI, the parent company has to have a minimum 10% of the ordinary shares of the foreign affiliates it is doing business with. At the same time, the investing company can qualify for an FDI as long as it has the voting power in a business enterprise that operates in a foreign country.

FDIs can be classified into two types, based on the types of restrictions imposed, and the prerequisites for these investments, namely outward FDIs and inward FDIs.

The government against all types of risks ensures the first type; it is subject to tax, and the risk coverage provided to the domestic industries granted to the local companies stand in the way of the first type of FDIs, also bearing the name of “direct investments abroad. However, the inward FDIs is more encouraged, as they include interest loans, tax breaks, grants, subsidies, as well as the removal of restrictions and limitations.