'Foreign direct investment (FDI)' is defined as "investment made to acquire lasting interest in enterprises operating outside of the economy of the investor."
[1] The FDI relationship, consists of a parent enterprise and a foreign affiliate which together form a ''
transnational corporation (TNC).'' In order to qualify as FDI the
investment must afford the parent enterprise ''control'' over its foreign affiliate. The
UN defines control in this case as owning 10% or more of the ordinary shares or voting power of an
incorporated firm or its equivalent for an unincorporated firm.
History
In the years after the Second World War global FDI was dominated by the United States, as much of the world recovered from the destruction brought by the conflict. The US accounted for around three-quarters of new FDI (including reinvested profits) between 1945 and 1960. Since that time FDI has spread to become a truly global phenomenon, no longer the exclusive preserve of OECD countries. FDI has grown in importance in the global economy with FDI stocks now constituting over 20 percent of global GDP.
Types of FDI
By Direction
Inward
Inward foreign direct investment is when foreign capital is invested in local resources.
Outward
Outward foreign direct investment, sometimes called "direct investment abroad", is when local capital is invested in foreign resources.
By Target
Greenfield investment
Main articles: Greenfield investment
Direct investment in new facilities or the expansion of existing facilities. Greenfield investments are the primary target of a host nation’s promotional efforts because they create new production capacity and jobs, transfer technology and know-how, and can lead to linkages to the global marketplace. The Organization for International Investment cites the benefits of greenfield investment (or insourcing) for regional and national economies to include increased employment (often at higher wages than domestic firms); investments in research and development; and additional capital investments. Criticism of the efficiencies obtained from greenfield investments include the loss of market share for competing domestic firms. Another criticism of greenfield investment is that profits are perceived to bypass local economies, and instead flow back entirely to the multinational's home economy. Critics contrast this to local industries whose profits are seen to flow back entirely into the domestic economy.
Mergers and Acquisitions
Main articles: Mergers and Acquisitions
Transfers of existing assets from local firms to foreign firms takes place; the primary type of FDI. Cross-border mergers occur when the assets and operation of firms from different countries are combined to establish a new legal entity. Cross-border acquisitions occur when the control of assets and operations is transferred from a local to a foreign company, with the local company becoming an affiliate of the foreign company. Unlike greenfield investment, acquisitions provide no long term benefits to the local economy-- even in most deals the owners of the local firm are paid in stock from the acquiring firm, meaning that the money from the sale could never reach the local economy. Nevertheless, mergers and acquisitions are a significant form of FDI and until around 1997, accounted for nearly 90% of the FDI flow into the United States. Mergers are the most common way for multinationals to do FDI.
Horizontal FDI
Investment in the same industry abroad as a firm operates in at home.
Vertical FDI
Backward Vertical FDI
Where an industry abroad provides inputs for a firm's domestic production process.
Forward Vertical FDI
Where an industry abroad sells the outputs of a firm's domestic production.
By Motive
FDI can also be categorized based on the motive behind the investment from the perspective of the investing firm:
Resource-Seeking
Investments which seek to acquire factors of production that are more efficient than those obtainable in the home economy of the firm. In some cases, these resources may not be available in the home economy at all (e.g. cheap labor and natural resources). This typifies FDI into developing countries, for example seeking natural resources in the Middle East and Africa, or cheap labor in Southeast Asia and Eastern Europe.
Market-Seeking
Investments which aim at either penetrating new markets or maintaining existing ones. FDI of this kind may also be employed as defensive strategy;
[2] it is argued that businesses are more likely to be pushed towards this type of investment out of fear of losing a market rather than discovering a new one.
[ Dunning, J. H. (1993). Multinational enterprises and the global economy. Wokingham, England ; Reading, Mass, Addison-Wesley] This type of FDI can be characterized by the foreign
Mergers and Acquisitions in the 1980’s by Accounting, Advertising and Law firms.
[3]
Efficiency-Seeking
Investments which firms hope will increase their efficiency by exploiting the benefits of
economies of scale and
scope, and also those of common ownership. It is suggested that this type of FDI comes after either resource or market seeking investments have been realized, with the expectation that it further increases the profitability of the firm.
[ Dunning, J. H. (1993). Multinational enterprises and the global economy. Wokingham, England ; Reading, Mass, Addison-Wesley]. Typically, this type of FDI is mostly widely practiced between developed economies; especially those within closely integrated markets (e.g. the EU).
[ Dunning, J. H. (1993)].
Strategic-Asset-Seeking
A tactical investment to prevent the loss of resource to a competitor. Easily compared to that of the oil producers, whom may not need the oil at present, but look to prevent their competitors from having it.
See also
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International investment position
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Bilateral Investment Treaty
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Multilateral Agreement on Investment
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Multilateral Investment Guarantee Agency
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International Centre for Settlement of Investment Disputes
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Foreign Affiliate Trade Statistics
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World Association of Investment Promotion Agencies
References
1. Foreign Direct Investment, United Nations Conference on Trade and Devolpment, www.unctad.org
2. Knickerbocker identified this phenomenon in his ‘follow-my-leader’ hypothesis in: Knickerbocker, F. T. (1973). Oligopolistic reaction and multinational enterprise. Boston(Mass.), Division of Research Graduate School of Business Administration Harvard University.
3. Dunning, J. H., B. Kogut and M. Blomstrom (1990). Globalization of firms and the competitiveness of nations. Lund, Institute of Economic Research Lund University ; Bromley : Chartwell-Bratt c1990
External links
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FDI.net - foreign direct investment information portal of the World Bank Group
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OECD work on international investment
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World Investment Report (UNCTAD)
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FDI: A lead driver for Sustainable Development? (Earth Summit 2002)
★ Investment Map -
Foreign direct investment together with foreign companies, exports and tariffs data
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Organization for International Investment
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