FDI stands for Foreign Direct Investment. FDI is any investment made by a country in another country. FDI usually happens in developing countries by countries that have surplus liquid money in hand. This is a long term investment whereby corporation of one country makes a major investment to acquire ownership in a commercial venture in another country for the purpose of control. Further, in cases of FDI, the investor’s purpose is to gain an effective voice in the management of the enterprise. For that, at least 10% of equity ownership or voting power of an enterprise is required to qualify an investor as a foreign direct investor. An example of FDI is an Indian company taking a majority stake in a company in America. It includes investment of foreign assets into domestic structures, equipment, and organizations but does not include foreign investment into the stock markets.
Features & Benefits Of FDI
- Quick Supply Of Money – FDI is a major source of external finance which means that countries with limited amounts of capital can receive finance beyond national borders from wealthier countries.
- Economy Growth – The country which accepts FDI will benefit by increased job opportunities, higher standards of living and better infrastructure. FDI helps developing countries in economic development.
- Higher Returns – Investors prefer FDI as there is always a higher chance that the FDI investment will return higher than any investment made in the home country.
- Reduced Cost Of Production: FDI also benefits by reducing the cost of production. This happens when the labor market in the foreign market is cheaper and also the rules are less restrictive.
- The investing country or company usually has a 10% stake in the enterprise making it eligible to multiply the money invested.
Different Types Of Foreign Direct Investments
Any investment made by your country in other countries will account for outward FDI. An outward-bound FDI is backed by the government against all types of associated risks. This form of FDI is subject to tax incentives as well as disincentives of various forms. Risk coverage provided to the domestic industries and subsidies granted to the local firms stand in the way of outward FDIs, which are also known as ‘direct investments abroad.’
All the FDIs invested by other countries in your country are called inward FDI. These include interest loans, tax breaks, grants, subsidies, and the removal of restrictions and limitations.
Vertical Foreign Direct Investment is undertaken for the purpose of exploiting raw material. In other words, it takes place when a multinational corporation owns some shares of a foreign enterprise, which supplies input for it or uses the output produced by the MNC.
Horizontal foreign direct investments is undertaken for the purpose of horizontal expansion to produce the same or similar kind of goods abroad. In other words it happen when a multinational company carries out a similar business operation in different nations.