Foreign Direct Investment

Topics: Foreign direct investment, Investment, Macroeconomics Pages: 4 (1051 words) Published: August 29, 2013
FOREIGN DIRECT INVESTMENT

Foreign direct investment (FDI) is a direct investment into production or business in a country by an individual or company in another country, either by buying a company in the target country or by expanding operations of an existing business in that country. Foreign direct investment is in contrast to portfolio investment which is a passive investment in the securities of another country such as stocks and bonds.

Types
1. Horizontal FDI arises when a firm duplicates its home country-based activities at the same value chain stage in a host country through FDI. 2. Platform FDI Foreign direct investment from a source country into a destination country for the purpose of exporting to a third country. 3. Vertical FDI takes place when a firm through FDI moves upstream or downstream in different value chains i.e., when firms perform value-adding activities stage by stage in a vertical fashion in a host country. Horizontal FDI decreases international trade as the product of them is usually aimed at host country; the two other types generally act as a stimulus for it.

Methods
The foreign direct investor may acquire voting power of an enterprise in an economy through any of the following methods: * by incorporating a wholly owned subsidiary or company anywhere * by acquiring shares in an associated enterprise

* through a merger or an acquisition of an unrelated enterprise * Participating in an equity joint venture with another investor or enterprise.

Forms of FDI
Foreign direct investment incentives may take the following forms. * low corporate tax and individual income tax rates
* tax holidays
* other types of tax concessions
* preferential tariffs
* special economic zones
* EPZ – Export Processing Zones
* Bonded Warehouses
* Maquiladoras
* investment financial subsidies
* soft loan or loan guarantees
* free land or land subsidies
* relocation & expatriation...
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