Definition: Foreign direct investment is of growing importance to global economic growth. This is especially for developing and emerging market countries. FDI from investors in developed areas like the EU and the U.S. provide funding and expertise to help smaller companies in these emerging markets to expand and increase international sales. Until recently, Southeast Asia was the greatest beneficiary of FDI. However, as of 2011, Latin America and the Caribbean pulled ahead, receiving a 35% increase in FDI.
The developed world also receives its fair share of cross-border investment, but of a different nature. Most of this is mergers and acquisitions between mature companies. These already-global corporations are engaged in restructuring or refocusing on core businesses. However, it gets recorded as FDI. This type of investment is more about maintenance, and less about making great stride in economic growth. (Source: UNCTAD, Annual FDI Report)
What Exactly Is Foreign Direct Investment?
The International Monetary Fund defines FDI as when one individual or business owns 10% or more of a foreign companyâ€™s capital. Every financial transaction afterwards is considered by the IMF as an additional direct investment. If an investor owns less than 10%, it is considered as nothing more than an addition to his/her stock portfolio. With only a 10% ownership, the investor may or may not have the controlling interest in the foreign business. However, even with just 10%, the investor usually has significant influence on the company's management, operations and policies. For this reason, most governmental agencies want to keep tabs on who is investing in their country's businesses.