Foreign direct investment

Foreign direct investment

Overview
Foreign direct investment (FDI) or foreign investment refers to the net inflows of investment
Investment
Investment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time...

 to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor.. It is the sum of equity capital,other long-term capital, and short-term capital as shown in the balance of payments
Balance of payments
Balance of payments accounts are an accounting record of all monetary transactions between a country and the rest of the world.These transactions include payments for the country's exports and imports of goods, services, financial capital, and financial transfers...

. It usually involves participation in management
Management
Management in all business and organizational activities is the act of getting people together to accomplish desired goals and objectives using available resources efficiently and effectively...

, joint-venture, transfer of technology and expertise.
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Encyclopedia
Foreign direct investment (FDI) or foreign investment refers to the net inflows of investment
Investment
Investment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time...

 to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor.. It is the sum of equity capital,other long-term capital, and short-term capital as shown in the balance of payments
Balance of payments
Balance of payments accounts are an accounting record of all monetary transactions between a country and the rest of the world.These transactions include payments for the country's exports and imports of goods, services, financial capital, and financial transfers...

. It usually involves participation in management
Management
Management in all business and organizational activities is the act of getting people together to accomplish desired goals and objectives using available resources efficiently and effectively...

, joint-venture, transfer of technology and expertise. There are two types of FDI: inward foreign direct investment and outward foreign direct investment, resulting in a net FDI inflow (positive or negative) and "stock of foreign direct investment", which is the cumulative number for a given period. Direct investment excludes investment through purchase of shares
Foreign portfolio investment
In economics, foreign portfolio investment is the entry of funds into a country where foreigners make purchases in the country’s stock and bond markets, sometimes for speculation....

. FDI is one example of international factor movement.

History


FDI is a measure of ownership
Ownership
Ownership is the state or fact of exclusive rights and control over property, which may be an object, land/real estate or intellectual property. Ownership involves multiple rights, collectively referred to as title, which may be separated and held by different parties. The concept of ownership has...

 of productive assets, such as factories, mines and land. Increasing foreign investment can be used as one measure of growing economic globalization. The figure below shows net inflows of foreign direct investment in the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...

. The largest flows of foreign investment occur between the industrialized countries (North America
North America
North America is a continent wholly within the Northern Hemisphere and almost wholly within the Western Hemisphere. It is also considered a northern subcontinent of the Americas...

, Western Europe
Western Europe
Western Europe is a loose term for the collection of countries in the western most region of the European continents, though this definition is context-dependent and carries cultural and political connotations. One definition describes Western Europe as a geographic entity—the region lying in the...

 and Japan
Japan
Japan is an island nation in East Asia. Located in the Pacific Ocean, it lies to the east of the Sea of Japan, China, North Korea, South Korea and Russia, stretching from the Sea of Okhotsk in the north to the East China Sea and Taiwan in the south...

). But flows to non-industrialized countries are increasing sharply. US International Direct Investment Flows:>
Period FDI Inflow FDI Outflow Net Inflow
1960-69 $ 42.18 bn $ 5.13 bn + $ 37.04 bn
1970-79 $ 122.72 bn $ 40.79 bn + $ 81.93 bn
1980-89 $ 206.27 bn $ 329.23 bn - $ 122.96 bn
1990-99 $ 950.47 bn $ 907.34 bn + $ 43.13 bn
2000-07 $ 1,629.05 bn $ 1,421.31 bn + $ 207.74 bn
Total $ 2,950.69 bn $ 2,703.81 bn + $ 246.88 bn

Types


A foreign direct investor may be classified in any sector of the economy and could be any one of the following:
  • an individual;
  • a group of related individuals;
  • an incorporated or unincorporated entity
    Unincorporated entity
    An unincorporated entity is an entity that has the same characteristics as a company but is not incorporated. It is also sometimes called a voluntary association....

    ;
  • a public company
    Public company
    This is not the same as a Government-owned corporation.A public company or publicly traded company is a limited liability company that offers its securities for sale to the general public, typically through a stock exchange, or through market makers operating in over the counter markets...

     or private company;
  • a group of related enterprises;
  • a government body;
  • an estate (law)
    Estate (law)
    An estate is the net worth of a person at any point in time. It is the sum of a person's assets - legal rights, interests and entitlements to property of any kind - less all liabilities at that time. The issue is of special legal significance on a question of bankruptcy and death of the person...

    , trust or other social institution; or
  • any combination of the above.

Methods


The foreign direct investor may acquire voting power of an enterprise in an economy through any of the following methods:
  • by incorporating a wholly owned subsidiary or company
  • by acquiring shares in an associated enterprise
  • through a merger or an acquisition of an unrelated enterprise
  • participating in an equity joint venture
    Joint venture
    A joint venture is a business agreement in which parties agree to develop, for a finite time, a new entity and new assets by contributing equity. They exercise control over the enterprise and consequently share revenues, expenses and assets...

     with another investor or enterprise


Foreign direct investment incentives may take the following forms:
  • low corporate tax
    Corporate tax
    Many countries impose corporate tax or company tax on the income or capital of some types of legal entities. A similar tax may be imposed at state or lower levels. The taxes may also be referred to as income tax or capital tax. Entities treated as partnerships are generally not taxed at the...

     and income tax
    Income tax
    An income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...

     rates
  • tax holiday
    Tax holiday
    A tax holiday is a temporary reduction or elimination of a tax. Programs may be referred to as tax abatements, tax subsidies, tax holidays, or tax reduction programs. Governments usually create tax holidays as incentives for business investment...

    s
  • other types of tax concessions
  • preferential tariffs
  • special economic zone
    Special Economic Zone
    A Special Economic Zone is a geographical region that has economic and other laws that are more free-market-oriented than a country's typical or national laws...

    s
  • EPZ - Export Processing Zones
  • Bonded Warehouse
    Bonded warehouse
    A Bonded warehouse is a building or other secured area in which dutiable goods may be stored, manipulated, or undergo manufacturing operations without payment of duty. It may be managed by the state or by private enterprise. In the latter case a customs bond must be posted with the government...

    s
  • Maquiladora
    Maquiladora
    A maquiladora or maquila is a concept often referred to as an operation that involves manufacturing in a country that is not the client's and as such has an interesting duty or tariff treatment...

    s
  • investment financial subsidies
  • soft loan
    Soft loan
    A soft loan is a loan with a below-market rate of interest. This is also known as soft financing. Sometimes soft loans provide other concessions to borrowers, such as long repayment periods or interest holidays. Soft loans are usually provided by governments to projects they think are worthwhile...

     or loan guarantees
  • free land or land subsidies
  • relocation & expatriation subsidies
  • job training & employment subsidies
  • infrastructure subsidies
  • R&D support
  • derogation from regulations (usually for very large projects)

Global foreign direct investment


The United Nations Conference on Trade and Development
United Nations Conference on Trade and Development
The United Nations Conference on Trade and Development was established in 1964 as a permanent intergovernmental body. It is the principal organ of the United Nations General Assembly dealing with trade, investment, and development issues....

 said that there was no significant growth of Global FDI in 2010. In 2010 was $1,122 billion and in 2009 was $1.114 billion. The figure was 25 percent below the pre-crisis average between 2005 to 2007.

Foreign direct investment in the United States


The United States is the world’s largest recipient of FDI. More than $228 billion in FDI flowed into the United States in 2010, with Europe contributing 75% of the total. The $2.1 trillion stock of FDI in the United States at the end of 2008 is the equivalent of approximately 16 percent of U.S. gross domestic product (GDP).

Benefits of FDI in America:
In the last 6 years, over 4000 new projects and 630,000 new jobs have been created by foreign companies, resulting in close to $314 billion in investment.
US affiliates of foreign companies have a history of paying higher wages than US corporations. Foreign companies have in the past supported an annual US payroll of $364 billion with an average annual compensation of $68,000 per employee.

Increased US exports through the use of multinational distribution networks. FDI has resulted in 30% of jobs for Americans in the manufacturing sector, which accounts for 12% of all manufacturing jobs in the US.

Affiliates of foreign corporation
Foreign corporation
A foreign corporation is a term used in the United States for an existing corporation that is registered to do business in a state or other jurisdiction other than where it was originally incorporated...

s spent more than $34 billion on research and development
Research and development
The phrase research and development , according to the Organization for Economic Co-operation and Development, refers to "creative work undertaken on a systematic basis in order to increase the stock of knowledge, including knowledge of man, culture and society, and the use of this stock of...

 in 2006 and continue to support many national projects. Inward FDI has led to higher productivity through increased capital, which in turn has led to high living standards
Standard of living
Standard of living is generally measured by standards such as real income per person and poverty rate. Other measures such as access and quality of health care, income growth inequality and educational standards are also used. Examples are access to certain goods , or measures of health such as...

.

Foreign direct investment in China


FDI in China has increased considerably in the last decade reaching $185 billion in 2010. China is the second largest recipient of FDI globally. FDI into China fell by over one-third in 2009 due the Global Financial Crisis (global macroeconomic factors) but rebounded in 2010.

Foreign direct investment in India


Starting from a baseline of less than USD 1 billion in 1990, a recent UNCTAD survey projected India as the second most important FDI destination (after China) for transnational corporations during 2010-2012. As per the data, the sectors which attracted higher inflows were services, telecommunication, construction activities and computer software and hardware. Mauritius, Singapore, the US and the UK were among the leading sources of FDI.

FDI in 2010 was $24.2 billion, a significant decrease from both 2008 and 2009. Foreign direct investment in August dipped by about 60 per cent to aprox. USD 34 billion, the lowest in 2010 fiscal, industry department data released showed. In the first two months of 2010-11 fiscal,FDI inflow into India was at an all-time high of $7.78 billion up 77% from $4.4 billion during the corresponding period in the previous year.

The world’s largest retailer WalMart has termed India’s decision to allow 51 per cent FDI in multi-brand retail as a “first important step” and said it will study the finer details of the new policy to determine the impact on its ability to do business in India.

Foreign direct investment and the developing world


FDI provides an inflow of foreign capital and funds, in addition to an increase in the transfer of skills, technology, and job opportunities. Many of the Four Asian Tigers benefited from investment abroad. A recent meta-analysis
Meta-analysis
In statistics, a meta-analysis combines the results of several studies that address a set of related research hypotheses. In its simplest form, this is normally by identification of a common measure of effect size, for which a weighted average might be the output of a meta-analyses. Here the...

 of the effects of foreign direct investment on local firms in developing and transition countries suggest that foreign investment robustly increases local productivity growth. The Commitment to Development Index
Commitment to Development Index
The Commitment to Development Index , published annually by the Center for Global Development, ranks the world’s richest countries on their dedication to policies that benefit the five billion people living in poorer nations. Rich and poor countries are linked in many ways; thus the Index looks...

ranks the "development-friendliness" of rich country investment policies.

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