What is FDI ?

Uploaded by : DreamGains Financials, Posted on : 11 Jul 2016

  • A foreign direct investment (FDI) is an investment made by a company or entity based in one country, into a company or entity based in another country.
  • According to the International Monetary Fund, foreign direct investment, commonly known as FDI, refers to an investment made to acquire lasting or long-term interest in enterprises operating outside of the economy of the investor.

  • The investment is direct because the investor, which could be a foreign person, company or group of entities, is seeking to control, manage, or have significant influence over the foreign enterprise.
  • FDI’s are important because , they are a major source of external finance which means that countries with limited amounts of capital can receive finance beyond national borders from wealthier countries.
  • Open economies with skilled workforces and good growth prospects tend to attract larger amounts of foreign direct investment than closed , highly regulated economies.
  • The investing company may make its overseas investment in a number of ways- either by setting up a subsidiary or associate company in the foreign country, by acquiring shares of an overseas company, or through a merger or joint venture.
  • The acceptance threshold for a foreign direct investment relationship, as defined by the Organization for Economic Cooperation and Development (OECD), is 10 %. That is, the foreign investor must own at least 10% or more of the voting stock or ordinary shares of the investee company.
  • An example of foreign direct investment would be an American company taking a majority stake in a company in India. Another example would be a Canadian company setting up a joint venture to develop a mineral deposit in chile.
  • FDI does not include foreign investment into the stock markets.
  • Foreign direct investment is thought to be more useful to a country than investments in the equity of its companies because equity investments are potentially “hot money” which can leave at the first sign of trouble, where as FDI is durable and generally useful whether things go well or badly.