Foreign Direct Investment: Types - Functions

Foreign Direct Investment

Studying MBA is perhaps the most difficult course for students worldwide to pursue. A part of what makes this course so immensely complicated is the topics you need to study. One such topic happens to be Foreign Direct Investment. It isn't unusual for students worldwide to seek guidance in comprehending the topic and develop a profound knowledge of the intricacies associated with it.

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What Is Foreign Direct Investment?

Trying to figure out what foreign direct investment is? Find the answers right here. Before we roll on to learn what to include in assignments on FDI, it is always wise to comprehend the meaning or definition of foreign direct investment.

A foreign direct investment (FDI) refers to purchasing an interest in a company by a company or an investor situated outside its borders. It is a cross-border investment in which an investor resident in one economy develops a lasting interest in and influence over an enterprise resident in another economy.

These kinds of investments commonly occur in open economies with skilled workforce and growth prospects. FDIs not only bring money with them but also skills, technology, and knowledge.

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What Is The Importance Of Foreign Direct Investment (FDI)?

In the words of our eminent stalwarts who offer assistance with assignments on FDI, foreign direct investments are extremely significant for emerging markets and developing economies where enterprises require finding and expertise to expand their international sales.

The importance of foreign direct investment is enlisted below-

It allows diversifying investors' portfolio
It promotes stable long term lending
It offers financing to developing countries
FDI infuses new technology in developing nations
It helps in creating more jobs and opportunities
It enables to raising of living standards in emerging economies.

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How Do Foreign Direct Investments work?

When it comes to foreign direct investment, everyone has an opinion. Organisations considering an FDI usually look only at companies in open economics that offer a skilled workforce and above-average growth prospects for an investor. Light government regulations also tend to become prized.

Foreign direct investment also usually goes beyond capital investment. This may incorporate the provision of management, technology and equipment as well. One of the key features of foreign direct investment is that it establishes effective control of the foreign business or at least substantial influence over its decision making.

FDI can be made in various ways, including opening a subsidiary or an associate company in a foreign country, acquiring a controlling interest in an existing foreign company, or utilising a merger or a joint venture with a foreign company.

The threshold for an FDI that establishes a controlling interest, as per the guidelines established by the Organisation of Economic Cooperation and Development (OECD), is a minimum 10% ownership stake in a foreign-based company.

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What Are The Types Of Foreign Direct Investment (FDI)?

Foreign direct investments are commonly categorised as horizontal, vertical, or conglomerate.

Horizontal FDI

The most common kind of FDI is horizontal FDI. It mainly revolves around investing funds in a foreign company belonging to the same industry as that owned or operated by the FDI investor. Here, an enterprise invests in another enterprise situated in a different country, wherein both the organisations are generating similar goods.

Vertical FDI

A vertical FDI occurs when an investment is made within a typical supply chain in a company. When vertical FDI happens, a business invests in an overseas firm that may supply or sell products.

Conglomerate FDI

When investments are made in two completely different companies of different industries, the conglomerate FDI is known as the transaction. Since the investing enterprise has no previous experience in the foreign company’s area of expertise, this often takes the form of a joint venture.

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What Are The Advantages And Disadvantages of Foreign Direct Investment?

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Take a look at certain advantages and disadvantages dished out by our experts that help you deliver the perfect paper in no time-

FDI can foster and maintain economic growth, both in the recipient country and in the country making the investment.

Developing countries have encouraged FDI to finance the construction of new infrastructure and the creation of jobs for their local workers. On the other hand, various multinational companies are seen to benefit from FDI as a means of expanding their footprints into the international markets.

A disadvantage of FDI is that it includes the regulation and oversight of multiple governments, leading to a higher level of political risk.

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What Are The Examples Of Foreign Direct Investment?

One of the most remarkable examples of FDI in the world today is the Chinese initiative popularly known as the One Belt One Road (OBOR). This program, sometimes referred to as the Belt and Road Initiative demonstrates China's commitment to substantial FDI in a range of infrastructure programs throughout Africa, Asia, and even parts of Europe. This program is typically funded by Chinese state-owned enterprises and companies with deep ties to the Chinese government.

Another great example is the North Atlantic Free Trade Agreement (NAFTA), the world’s largest free trade agreement. It increased the FDI among the United States, Canada, and Mexico to $731 billion in 2015. Other examples are Walmart acquiring 77% of Flipkart’s sales and the Amazon and Catamaran joint venture.

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