FOREIGN DIRECT INVESTMENT

Topics: Investment, Foreign direct investment, Insurance Pages: 12 (4910 words) Published: September 12, 2014
Foreign direct investment (FDI) is a direct investment into production or business in a country by an individual or company of 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. Definitions

Broadly, foreign direct investment includes "mergers and acquisitions, building new facilities, reinvesting profits earned from overseas operations and intra company loans".[1] In a narrow sense, foreign direct investment refers just to building new facilities. The numerical FDI figures based on varied definitions are not easily comparable. As a part of the national accounts of a country, and in regard to the GDP equation Y=C+I+G+(X-M)[Consumption + gross Investment + Government spending +(exports - imports)], where I is domestic investment plus foreign investment, FDI is defined as the net inflows of investment (inflow minus outflow) to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor.[2] FDI is the sum of equity capital, other long-term capital, and short-term capital as shown the balance of payments. FDI usually involves participation in management, joint-venture, transfer of technology and expertise. Stock of FDI is the net (i.e. Inward FDI minus Outward FDI) cumulative FDI for any given period. Direct investment excludes investment through purchase of shares.[3] FDI is one example of international factor movements. 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.[4] 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. 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[5] Forms of FDI incentives
Foreign direct investment incentives may take the following forms:[citation needed] 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
infrastructure subsidies
R&D support
derogation from regulations (usually for very large projects) Governmental Investment Promotion Agencies (IPAs) use various marketing strategies inspired by the private sector to try and attract inward FDI, including Diaspora marketing. by excluding the internal investment to get a profited downstream. Importance and barriers to FDI

The rapid growth of world population since 1950 has occurred mostly in developing countries.[citation needed] This growth has been matched by more rapid increases in gross domestic product, and thus income per capita has increased in most countries around the world since 1950. While the quality of the data from 1950 may be of question, taking the average across a range of estimates confirms this. Only war-torn and countries with other serious external problems, such as Haiti, Somalia, and Niger have not registered substantial increases in GDP per capita. The data available to confirm this are freely available.[6] An...
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