Direct investment, also known as foreign direct investment (FDI), is defined as an investment made by a company or individual in one country in business interests in another country, in the form of establishing ownership or controlling interest in a foreign company.
Different from portfolio investment, which refers to investing in foreign stocks and securities, direct investment results in a lasting interest in, and control over, the foreign company. A direct investment may be made through the purchase of shares, establishment of a joint venture, or acquiring a foreign company.
There are two main types of direct investment: inward foreign direct investment (FDI), which is when a foreign company invests in a domestic company, and outward foreign direct investment (OFDI), which is when a domestic company invests in a foreign company.
The key benefits of direct investment include access to new markets, access to new technologies, and the ability to build a global brand. Additionally, FDI can lead to the transfer of knowledge and skills, and can help to create employment opportunities.
There are also some risks associated with direct investment, such as political and economic instability in the host country, currency fluctuations, and difficulties in repatriating profits.
How is FDI measured?
FDI can be measured in a number of ways, but the most common method is to calculate the value of foreign investment into a country as a percentage of that country's GDP.
In order to calculate FDI as a percentage of GDP, you first need to determine the total value of foreign investment into the country. This can be done by adding up the values of all foreign-owned assets in the country, including factories, land, buildings, and shares in companies.
Once you have the total value of foreign investment, you can then calculate FDI as a percentage of GDP by dividing the total value of foreign investment by the country's GDP.
What are the three basic forms of FDI?
There are three primary forms of foreign direct investment (FDI):
1. Greenfield investment – This is when a company builds a new facility in a foreign country from scratch. This type of investment is very capital intensive and carries the greatest risk, but can also provide the greatest rewards.
2. Mergers and acquisitions – This is when a company buys an existing company in a foreign country. This can be less risky than a greenfield investment, but still carries a fair amount of risk.
3. Joint ventures – This is when two or more companies come together to create a new entity in a foreign country. This can be less risky than a greenfield investment or an acquisition, but still carries some risk.
What increases FDI?
There are many factors that can increase FDI. A country's political stability, economic growth, and infrastructure are all major factors that can attract foreign investors. Additionally, a country's tax laws and regulations can also impact FDI. For example, if a country has favorable tax laws for foreign investors, this can make the country more attractive to foreign investors. What is the difference between FDI and ODI? There are three main differences between foreign direct investment (FDI) and overseas direct investment (ODI):
1. FDI is an investment made by a company or individual in one country in business interests in another country, with the intention of establishing a lasting interest in the company or enterprise in that other country. ODI, on the other hand, is defined as an investment made by a company or individual from one country in business interests in another country with the intention of earning a return on that investment, but without necessarily having a lasting interest in the company or enterprise in that other country.
2. FDI typically takes the form of a company or individual investing in equity in a foreign company, while ODI can take a variety of forms, including loans, bonds, and portfolio investment.
3. FDI is often motivated by factors such as access to new markets, technology, or cheaper labor, while ODI is often motivated by factors such as earning a higher return on investment than what is available in the home country.
What is FDI in simple words?
Foreign Direct Investment (FDI) occurs when an investor based in one country makes a capital investment in another country. The investor typically obtains a controlling interest in the company that receives the investment, meaning that the investor has a say in how the company is managed. FDI is distinct from portfolio investment, which is when an investor purchases stocks or bonds of a foreign company without having any control over the company’s management.
FDI can take many forms, such as building a new factory or investing in an existing company. FDI is often seen as a way to stimulate economic growth and create jobs in the receiving country. For example, a foreign company may build a new factory in a developing country, which can create jobs for locals. FDI can also bring new technology and know-how to the receiving country, which can boost productivity and growth.
There are also potential risks associated with FDI, such as political instability in the receiving country or the potential for the local workforce to be displaced by foreign workers.
Overall, FDI can be a positive force for economic growth, but there are also risks to consider before making any investment.