Foreign Direct Investment

FDI or Foreign Direct Investment is a category of cross-border investment in which an investor resident in one economy establishes a lasting interest in and a significant degree of influence over an enterprise resident in another economy. Ownership of 10 percent or more of the voting power in an enterprise in one economy by an investor in another economy is evidence of such a relationship.

FDI is a key element in international economic integration because it creates stable and long-lasting links between economies. FDI is an important channel for the transfer of technology between countries, promotes international trade through access to foreign markets, and can be an important vehicle for economic development. The indicators covered in this group are inward and outward values for stocks, flows and income, by partner country and by industry and FDI restrictiveness.

They are directly involved with daily operations in the country i.e. they are bringing money, knowledge, skills, and technology to the country.

Considering 2020 rate, China is leading in attracting FDI, followed by the US.

FDI is classified into three categories:

Horizontal: a business expands its domestic operations to a foreign country. In this case, the business conducts the same activities but in a foreign country. For example, McDonald’s opening restaurants in Japan would be considered horizontal FDI.

Vertical: a business expands into a foreign country by moving to a different level of the supply chain. In other words, a firm conducts different activities abroad but these activities are still related to the main business. Using the same example, McDonald’s could purchase a large-scale farm in Canada to produce meat for their restaurants.

• Conglomerate:a business acquires an unrelated business in a foreign country. This is uncommon, as it requires overcoming two barriers to entry: entering a foreign country and entering a new industry or market.

It is a large commitment to enhance the growth of a company in foreign as well as in the main country. The multinational companies benefit the most as they can make their presence felt on a larger scale. The only disadvantage is that it involves rules and regulations of multiple governments that can give rise to political risks.