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Foreign direct

From Wikipedia, the free encyclopedia
A foreign direct investment (FDI) is
an investment in the form of a controlling
ownership in a business in one country by an entity
based in another country.[1] It is thus distinguished
from a foreign portfolio investment by a notion of
direct control.
The origin of the investment does not impact the
definition, as an FDI: the investment may be made
either "inorganically" by buying a company in the
target country or "organically" by expanding the
operations of an existing business in that country.
 1Definition
 2Theoretical background
 3Methods
o 3.1Forms of FDI incentives

 4Importance and barriers to FDI

o 4.1Developing world

o 4.2China
o 4.3India
o 4.4United States

o 4.5Canada

o 4.6United Kingdom

o 4.7Russian Federation

 5See also
 6References
 7External links

Definition [edit]

Broadly, foreign direct investment includes

"mergers and acquisitions, building new facilities,
reinvesting profits earned from overseas
operations, and intra company loans". In a narrow
sense, foreign direct investment refers just to
building new facility, and 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,
long-term capital, and short-term capital as shown
in 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., outward FDI minus inward FDI)
cumulative FDI for any given period. Direct
investment excludes investment through purchase
of shares.[3]
FDI, a subset of international factor movements, is
characterized by controlling ownership of a
business enterprise in one country by an entity
based in another country. Foreign direct investment
is distinguished from foreign portfolio investment, a
passive investment in the securities of another
country such as public stocks and bonds, by the
element of "control".[1]According to the Financial
Times, "Standard definitions of control use the
internationally agreed 10 percent threshold of
voting shares, but this is a grey area as often a
smaller block of shares will give control in widely
held companies. Moreover, control of technology,
management, even crucial inputs can confer de
facto control."[1]

Theoretical background [edit]

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According to Grazia Ietto-Gillies (2012),[4] prior

to Stephen Hymer’s theory regarding direct
investment in the 1960s, the reasons behind
Foreign Direct Investment and Multinational
Corporations were explained by neoclassical
economics based on macro economic principles.
These theories were based on the classical theory
of trade in which the motive behind trade was a
result of the difference in the costs of production of
goods between two countries, focusing on the low
cost of production as a motive for a firm’s foreign
activity. For example, Joe S. Bain only explained
the internationalization challenge through three
main principles: absolute cost advantages, product
differentiation advantages and economies of scale.
Furthermore, the neoclassical theories were
created under the assumption of the existence of
perfect competition. Intrigued by the motivations
behind large foreign investments made by
corporations from the United States of America,
Hymer developed a framework that went beyond
the existing theories, explaining why this
phenomenon occurred, since he considered that
the previously mentioned theories could not explain
foreign investment and its motivations.
Facing the challenges of his predecessors, Hymer
focused his theory on filling the gaps regarding
international investment. The theory proposed by
the author approaches international investment
from a different and more firm-specific point of
view. As opposed to traditional macroeconomics-
based theories of investment, Hymer states that
there is a difference between mere capital
investment, otherwise known as portfolio
investment, and direct investment. The difference
between the two, which will become the
cornerstone of his whole theoretical framework, is
the issue of control, meaning that with direct
investment firms are able to obtain a greater level
of control than with portfolio investment.
Furthermore, Hymer proceeds to criticize the
neoclassical theories, stating that the theory of
capital movements cannot explain international
production. Moreover, he clarifies that FDI is not
necessarily a movement of funds from a home
country to a host country, and that it is
concentrated on particular industries within many
countries. In contrast, if interest rates were the
main motive for international investment, FDI would
include many industries within fewer countries.
Another observation made by Hymer went against
what was maintained by the neoclassical theories:
foreign direct investment is not limited to
investment of excess profits abroad. In fact, foreign
direct investment can be financed through loans
obtained in the host country, payments in
exchange for equity (patents, technology,
machinery etc.), and other methods. The main
determinants of FDI is side as well as growth
prospectus of the economy of the country when
FDI is made. Hymer proposed some more
determinants of FDI due to criticisms, along with
assuming market and imperfections. These are as
1. Firm-specific advantages: Once
domestic investment was
exhausted, a firm could exploit its
advantages linked to market
imperfections, which could
provide the firm with market
power and competitive
advantage. Further studies
attempted to explain how firms
could monetize these advantages
in the form of licenses.
2. Removal of conflicts: conflict
arises if a firm is already
operating in foreign market or
looking to expand its operations
within the same market. He
proposes that the solution for this
hurdle arose in the form of
collusion, sharing the market with
rivals or attempting to acquire a
direct control of production.
However, it must be taken into
account that a reduction in
conflict through acquisition of
control of operations will increase
the market imperfections.
3. Propensity to formulate an
internationalization strategy to
mitigate risk: According to his
position, firms are characterized
with 3 levels of decision making:
the day to day supervision,
management decision
coordination and long term
strategy planning and decision
making. The extent to which a
company can mitigate risk
depends on how well a firm can
formulate an internationalization
strategy taking these levels of
decision into account.
Hymer's importance in the field of International
Business and Foreign Direct Investment stems
from him being the first to theorize about the
existence of Multinational Enterprises (MNE) and
the reasons behind Foreign Direct Investment (FDI)
beyond macroeconomic principles, his influence on
later scholars and theories in International
Business, such as the OLI (Ownership, Location
and Internationalization) theory by John
Dunning and Christos Pitelis which focuses more
on transaction costs. Moreover, “the efficiency-
value creation component of FDI and MNE activity
was further strengthened by two other major
scholarly developments in the 1990s: the resource-
based (RBV) and evolutionary theories" (Dunning &
Pitelis, 2008) [5] In addition, some of his predictions
later materialized, for example the power of
supranational bodies such as IMF or the World
Bank that increases inequalities (Dunning & Piletis,
Types of FDI
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.[6]
2. Platform FDI Foreign direct
investment from a source country
into a destination country for the
purpose of exporting to a third
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.[6]

Methods [edit]

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
Forms of FDI incentives[edit]
Foreign direct investment incentives may take the
following forms:[8]
 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


 free land or land subsidies

 relocation & expatriation

 infrastructure subsidies

 R&D support

 Energy

 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 [edit]

The rapid growth of world population since 1950

has occurred mostly in developing countries.[citation
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.[10]
An increase in FDI may be associated with
improved economic growth due to the influx of
capital and increased tax revenues for the host
country. Host countries often try to channel FDI
investment into new infrastructure and other
projects to boost development. Greater competition
from new companies can lead to productivity gains
and greater efficiency in the host country and it has
been suggested that the application of a foreign
entity’s policies to a domestic subsidiary may
improve corporate governance standards.
Furthermore, foreign investment can result in the
transfer of soft skills through training and job
creation, the availability of more advanced
technology for the domestic market and access to
research and development resources.[11] The local
population may benefit from the employment
opportunities created by new businesses.[12] In
many instances, the investing company is simply
transferring its older production capacity and
machines, which might still be appealing to the host
country because of technological lags or under-
development, in order to avoid competition against
its own products by the host country/company.
Developing world[edit]
A 2010 meta-analysis of the effects of foreign direct
investment (FDI) on local firms in developing and
transition countries suggests that foreign
investment robustly increases local productivity
growth. [13] The Commitment to Development
Index ranks the "development-friendliness" of rich
country investment policies.
FDI in China, also known as RFDI (renminbi
foreign direct investment), has increased
considerably in the last decade, reaching $19.1
billion in the first six months of 2012, making China
the largest recipient of foreign direct investment
and topping the United States which had $17.4
billion of FDI.[14] In 2013 the FDI flow into China was
$24.1 billion, resulting in a 34.7% market share of
FDI into the Asia-Pacific region. By contrast, FDI
out of China in 2013 was $8.97 billion, 10.7% of the
Asia-Pacific share.[15]
During the global financial crisis FDI fell by over
one-third in 2009 but rebounded in 2010.[16]
FDI into the Chinese mainland maintained steady
growth in 2015 despite the economic slowdown in
the world’s second-largest economy. FDI, which
excludes investment in the financial sector, rose
6.4 percent year on year to $126.27 billion in
During the first nine months of 2016, China
reportedly surpassed the US to become the world’s
largest assets acquirer, measured by the value of
corporate takeovers. As part of the transition by
Chinese investors from an interest in developing
economies to high-income economies, Europe has
become an important destination for Chinese
outward FDI. In 2014 and 2015, the EU was
estimated to be the largest market for Chinese
acquisitions, in terms of value.[18]
The rapid increase in Chinese takeovers of
European companies has fueled concerns among
political observers and policymakers over a wide
range of issues. These issues include potential
negative strategic implications for individual EU
member states and the EU as a whole, links
between the Chinese Communist Party and the
investing enterprises, and the lack of reciprocity in
terms of limited access for European investors to
the Chinese market.[18] [1]
Similarly, concerns among low-income households
within Australia have prompted several non formal
inquiries into direct foreign investment activities
from china. As a result numerous Australian
political representatives have been investigated,
Sam Dastyari[19] has resigned as a result.[20]
Main article: Foreign Direct Investment in India
Foreign investment was introduced in 1991
under Foreign Exchange Management Act (FEMA),
driven by then finance minister Manmohan Singh.
As Singh subsequently became the prime minister,
this has been one of his top political problems,
even in the current times.[21][22] India disallowed
overseas corporate bodies (OCB) to invest in
India.[23] India imposes cap on equity holding by
foreign investors in various sectors, current FDI
in aviation and insurance sectors is limited to a
maximum of 49%.[24][25]
Starting from a baseline of less than $1 billion in
1990, a 2012 UNCTAD survey projected India as
the second most important FDI destination (after
China) for transnational corporations during 2010–
2012. As per the data, the sectors that attracted
higher inflows were services, telecommunication,
construction activities and computer software and
hardware. Mauritius, Singapore, US and UK were
among the leading sources of FDI. Based on
UNCTAD data FDI flows were $10.4 billion, a drop
of 43% from the first half of the last year.[26]
Nine from 10 largest foreign companies investing in
India(from April 2000- January 2011) are based in
Mauritius .[27] List of the ten largest foreign
companies investing in India (from April 2000-
January 2011) are as follows [27] --
1. TMI Mauritius Ltd. ->Rs 7200
crore/$1600 million
2. Cairn UK Holding -> Rs6666
crores/$1492 million
3. Oracle Global (Mauritius) Ltd. ->
Rs 4805 crore/$1083 million
4. Mauritius Debt Management Ltd.-
> Rs 3800 crore/$956 million
5. Vodafone Mauritius Ltd. – Rs
4000 crore/$801 million
6. Etisalat Mauritius Ltd. – Rs 3228
7. CMP Asia Ltd. – Rs 2638.25
crore/$653.74 million
8. Oracle Global Mauritius Ltd. – Rs
2575.88 crore / $563.94 million
9. Merrill Lynch(Mauritius) Ltd. – Rs
2230.02 crore / $483.55 million
10. Name of the company not
given (but the Indian company
which got the FDI is Dhabol
Power company Ltd.)
In 2015, India emerged as top FDI destination
surpassing China and the US. India attracted FDI
of $31 billion compared to $28 billion and $27
billion of China and the US respectively.[28][29] India
received $63 billion in FDI in 2015.[30] India also
allowed 100% FDI in many sectors on 2016
United States[edit]
Broadly speaking, the United States has a
fundamentally "open economy" and low barriers to
U.S. FDI totaled $194[32] Billion in 2010. 84% of FDI
in the United States in 2010 came from or through
eight countries: Switzerland, the United Kingdom,
Japan, France, Germany, Luxembourg, the
Netherlands, and Canada.[33] A major source of
investment is real estate; the foreign investment in
this area totaled $92.2 billion in 2013,[34] under
various forms of purchase structures (considering
the U.S. taxation and residency laws).[citation needed]
A 2008 study by the Federal Reserve Bank of San
Francisco indicated that foreigners hold greater
shares of their investment portfolios in the United
States if their own countries have less developed
financial markets, an effect whose magnitude
decreases with income per capita. Countries with
fewer capital controls and greater trade with the
United States also invest more in U.S. equity and
bond markets.[35]
White House data reported in 2011 found that a
total of 5.7 million workers were employed at
facilities highly dependent on foreign direct
investors. Thus, about 13% of the American
manufacturing workforce depended on such
investments. The average pay of said jobs was
found as around $70,000 per worker, over 30%
higher than the average pay across the entire U.S.
President Barack Obama said in 2012, "In a global
economy, the United States faces increasing
competition for the jobs and industries of the future.
Taking steps to ensure that we remain the
destination of choice for investors around the world
will help us win that competition and bring
prosperity to our people."[31]
In September 2013, the United States House of
Representatives voted to pass the Global
Investment in American Jobs Act of 2013 (H.R.
2052; 113th Congress), a bill which would direct
the United States Department of Commerce to
"conduct a review of the global competitiveness of
the United States in attracting foreign direct
investment".[36] Supporters of the bill argued that
increased foreign direct investment would help job
creation in the United States.[37]
Foreign direct investment by country[38] and by
industry[39] are tracked by Statistics Canada.
Foreign direct investment accounted for CAD$634
billion in 2012, eclipsing the United States in this
economic measure. Global FDI inflows and
outflows are tabulated by Statistics Canada.[40]
United Kingdom[edit]
The UK has a very free market economy and is
open to foreign investment. Prime Minister Theresa
May has sought investment from emerging markets
and from the Far East in particular and some of
Britain's largest infrastructure including energy and
skyscrapers such as The Shard have been built
with foreign investment.
Russian Federation[edit]
 History of Foreign Investment Law
In 1991,[41] for the first time, Russia regulated the
form, range and favorable policy of FDI in Russia.
In 1994,[41] a consulting council of FDI was an
established in Russia, which was responsible for
setting tax rate and policies for exchange rate,
improving investment environment, mediating
relationship between central and local government,
researching and improving images of FDI work,
and increasing the right and responsibility of
Ministry of Economic in appealing FDI and
enforcing all kinds of policies.
In 1997,[41] Russia starts to enact policies appealing
for FDI on particular industries, for example, fossil
fuel, gas, woods, transportation, food reprocessing,
In 1999,[41] Russia announced a law named 'FDI of
the Russian Federation', which aimed at providing
a basic guarantee for foreign investors on
investing, running business, earnings.
In 2008,[41] Russia banned FDI on strategic
industries, such as military defense and country
In 2014,[42] president Putin announced that once
abroad Russian investment inflows legally, it would
not be checked by tax or law sector. This is a
favorable policy of Putin to appeal Russian
investment to come back.
 Structure of foreign investment in
1. Direct investment: Investing
directly with cash. Basically,
investment more than 10% of the
item is called Direct investment.
2. Portfolio investment: Investing
indirectly with company loans,
financial loans, stocks, etc.
Basically, investment less than
10% of the item is called Portfolio
3. Other investment: Except for
direct and portfolio investment,
including international assistance
and loans for original country.
FDI of RF 1994-2012

Main item of inflow investment in Russian

See also [edit]

 Business and economics portal

 Investment promotion agency

 Bilateral investment treaty
 Foreign exchange controls
 List of countries by FDI abroad
 List of countries by received FDI
 Foreign direct investment and the

References [edit]

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Edward Elgar: Cheltenham, UK.
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C.N. (2008). Stephen Hymer’s
contribution to international business
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External links [edit]

 FDI Magnet maintains a list of FDI

resources, including a list
of IPAs active on Twitter The Dollar
 Hellström, Jerker (2016) China's
Acquisitions in Europe: European
Perceptions of Chinese Investments
and their Strategic Implications,
(Stockholm : Swedish Defence
Research Agency).
 Ott, Mack (2002). "Foreign
Investment in the United States".
In David R.
Henderson (ed.). Concise
Encyclopedia of Economics (1st
ed.). Library of Economics and
Liberty.OCLC 317650570, 5001627
0, 163149563
 Foreign Direct Investment in the
United States. Transactions.
 Foreign Direct Investment in the
United States Department of
Commerce and Council of
Economic Advisers
 Interactive Historical Data: Foreign
Direct Investment in the United
States — FlowFederal Reserve
Board of Governors
 OECD Benchmark Definition of
Foreign Direct Investment (2008)
 IMF: How Countries Measure FDI
 Tracking cross-border investments
using applied onomastics
 Foreign direct investment
 Economic geography
 International business
 International macroeconomics
 International factor movements
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