Foreign Direct Investment (FDI) Definition & Meaning

A foreign direct investment (FDI) is defined as a financial investment made by a company or an individual from one country into business interests in another country. In general, FDI occurs when a foreign corporation conducts foreign business activities or acquires foreign business assets. On the other hand, foreign direct investments are different from portfolio investments, where an investor buys equities in foreign-based companies.

The main characteristic of foreign direct investment would be that it develops either effective control over or at least significant influence over a foreign company’s decision-making. Since it generates strong and lifelong connections between economies, FDI is an essential aspect of international economic integration. FDI facilitates the transfer of technology across countries, encourages international trade by providing foreign markets, and can help countries prosper economically.

Open economies with a trained workforce and above-average growth potential for the investor are what foreign direct investments are most typically made in. Foreign direct investment usually includes more than just a capital investment. Management or technological provisions may also be included.

When a person or a firm owns 10% or more of a foreign company, it is regarded as foreign direct investment. The International Monetary Fund considers it part of an investor’s stock portfolio if they possess less than 10%. The individual investor does not have a controlling interest in the foreign company if he or she owns 10% of it. It does, however, provide them power over the company’s operations, regulations, and management. As a result, governments keep an eye on investments in their countries’ industries.

For developing and emerging market countries, foreign direct investment is important. To increase their worldwide sales, their businesses require multinational funding and experience. Their countries require private investment in water, infrastructure, and energy to increase jobs and salaries. The United Nations has also advocated for the use of FDI to address climate change’s effects.

Vertical, horizontal, and conglomerate foreign direct investments are the most popular classifications of foreign direct investment. The one in which related but different business activities from the investor’s primary business are formed or obtained in a foreign country is called a vertical foreign direct investment. What occurs when an investor establishes a similar kind of business activity in a foreign country as it does in its home country is called a horizontal foreign direct investment.

Lastly, the one in which a firm or individual invests in a business outside of their own country that is unconnected to their present business is called a conglomerate foreign direct investment. Because this kind of investment requires starting a new industry for the investor, it frequently takes the form of a joint venture with a foreign corporation already operating in the field.

However, there is another form of foreign direct investment that has been observed throughout time and that is platform foreign direct investment where a company grows into a foreign country, yet the foreign operations’ output is transported to a third country. This kind of FDI is also known as export-platform FDI. Platform FDI is most common in low-cost areas within free-trade zones.