Foreign direct investment (FDI) is known as an investment which is made by an individual or a firm from one nation into that of business interests which are situated in another nation. As a general rule, FDI only takes place when the investor establishes some foreign business relations which determine the ownership or controlling interests in that of a foreign country. Also, one should keep in mind that foreign direct investments are different from portfolio investments where investors purchase the equities of foreign-based companies.
How much percentage should a business owner own in a foreign country?
Foreign direct investment is classified as such when a business or an individual occupies around 10% of a foreign conglomerate. The occupied percent can be more than 10% in other cases. However, when the occupied percent is lesser than 10%, then it is defined as part of her or his stock portfolio by the International Monetary Fund. But as one can imagine, this 10% of ownership doesn't allow the investor to have any control over the interest, but it does let them assert influence over the operations, policies, and management of the company.
Features of Foreign Direct Investments
- These are mainly made in those open economies which come with a skilled workforce as well as an above average growth prospect for the investor in question.
- FDI also involves a lot more than just capital investment. There are provisions of technology or management too.
- The main feature of foreign direct investment is that it establishes substantial influence over the whole decision-making process of international business.
Methods of Foreign Direct Investment
FDI can be made in some ways, like opening up of an associate company or subsidiary in a foreign nation or getting a controlling interest in that of an already existing foreign corporation. It can also be done by going through a joint venture or merger with a foreign corporation.
Perks of Foreign Direct Investment
- It makes local economic benefits possible in various locations: The individuals and companies who take part in FDI can easily stimulate economic growth for the community at a local level. Profits can get reinvested in creating more organizational opportunities or in workers, which will, in turn, do new jobs and also more FDI opportunities along with them.
- International trade becomes easier: There are important tariffs which are imposed by various countries for goods and services which enter their borders. This can make it challenging to keep products at affordable prices. But through FDI, it can be possible to either eliminate these tariffs or limit them at the least. This also ends up giving the local businesses more control over the market while simultaneously maintaining competitive prices.
- New technologies: FDI brings in better technologies which may not be available in the target country. Examples can include satellites being launched with the aid of other nations to enable the growth of communication in the country.
- Increase in Capital inflow: FDI also allows for improved capital inflow in the country, especially in the important sectors. Apart from money, it can also include monetary investment so that there can be rapid economic development in the nation.
Foreign direct investment is an essential factor in the growth and development of a country. It helps propel it forward.