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Foreign Direct Investment

Foreign Direct Investment

Foreign direct investment (FDI) is defined as "investment made to acquire lasting interest in enterprises operating outside of the economy of the investor." The FDI relationship consists of a parent enterprise and a foreign affiliate which together form a Multinational corporation (MNC). 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; lower ownership shares are known as portfolio investment

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
1. Inward
Inward foreign direct investment is a particular form of inward investment when foreign capital is invested in local resources.
Inward FDI is encouraged by:
• Tax breaks, subsidies, low interest loans, grants, lifting of certain restrictions
• The thought is that the long term gain is worth short term loss of income
Inward FDI is restricted by:
• Ownership restraints or limits
• Differential performance requirements

2. Outward

Outward foreign direct investment, sometimes called "direct investment abroad", is when local capital is invested in foreign resources. Yet it can also be used to invest in imports and exports from a foreign commodity country.
Outward FDI is encouraged by:
• Government-backed insurance to cover risk


Outward FDI is restricted by:
• Tax...