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Foreign Direct Investments (FDI)

Foreign direct investment (FDI) is characterized as a long-range investment by a foreign direct investor in an enterprise resident in an economy other than that in which the foreign direct investor is based. The Foreign Direct Investment interrelation, consists of a parent enterprise and a foreign affiliate which together form a transnational corporation (TNC).
In order to qualify as Foreign Direct Investment 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.

Different kinds of Foreign Direct Investments

Greenfield Investments

Greenfield Investments means the expansion of existing facilities or a direct investment in new facilities (in an area where no previous facilities exist). The name comes from the idea of building a facility verbatim on a "green" field, such as farmland or a forest. Over time the term has become more metaphoric.

Greenfield investments are the primary objective of a host nation’s promotional efforts, due to create new production capacity and jobs, transfer technology and know-how, and can lead to linkages to the global marketplace. However, it often does this by crowding out local industry; multinationals are able to produce goods more cheaply (because of advanced technology and efficient processes) and uses up resources (intermediate commodities, labor, etc). Another downside of greenfield investment is that profits from production do not feed back into the local economy, but instead to the multinational's home economy. This is in contrast to local industries whose profits flow back into the domestic economy to promote growth. Greenfield Investing is offered as an alternative to another types of investment, for example as mergers and acquisitions, joint ventures, or licensing agreements.

Brownfield Investments

A related term to "Greenfield Investment" which is becoming popular is Brownfield Investment, where a site in advance used for a "un-clean" business purpose, such as a steel mill or oil refinery, is cleaned up and used for a less polluting purpose, such as commercial office space or a residential area.

The term "brownfields" came into use in 1992 year, at a U.S. congressional field hearing hosted by the Northeast Midwest Congressional Coalition.

Mergers and Acquisitions

Mergers and Acquisitions: transfers of existing assets from local firms to foreign firms takes place. This is the primary kind of foreign direct investments.

Foreign (or cross-border) mergers occur when the assets and operation of firms from different countries are integrated to establish a new legal entity. Mergers are the most common way for multinationals to do Foreign Direct Investment.

Foreign acquisitions occur when the control of assets and operations is transferred from a local to a foreign company, with the local company becoming an affiliate of the foreign company. Unlike greenfield investment, acquisitions provide no long term benefits to the local economy - even in most deals the owners of the local firm are paid in stock from the acquiring firm, meaning that the money from the sale could never reach the local economy. Nevertheless, mergers and acquisitions are a significant form of Foreign Direct Investment.

Horizontal Foreign Direct Investment: investment in the same foreign industry as a firm operates in at home.

Vertical Foreign Direct Investment takes two forms:

1. backward vertical FDI: where an industry abroad provides inputs for a firm's domestic production process
2. forward vertical FDI: in which an industry abroad sells the outputs of a firm's domestic production

Anover kind of Foreign Direct Investment

Foreign Direct Investment also include investments which based on the motive behind the investment from the perspective of the investing firm:

Market Seeking

Investments which target at either penetrating new markets or maintaining existing ones. Foreign Direct Investment of this type may also be employed as defensive strategy;it is argued that businesses are more likely to be pushed towards this kind of investment out of fear of losing a market rather than discovering a new one.This kind of Foreign Direct Investment can be distinguished by the foreign Mergers and Acquisitions in the 1980’s by Accounting, Advertising and Law firms.

Resource Seeking

Investments which seek to acquire factors of production that are more efficient than those obtainable in the home economy of the firm. In some cases, these resources may not be available in the home economy at all (e.g. natural resources, anover words - naturally occurring materials such as coal, fertile land, etc., that can be used by man, and cheap labor). This characterizes Foreign Direct Investment into developing countries, for example seeking cheap labor in Eastern Europe and Southeast Asia, or natural resources in the Middle East and Africa.

Efficiency Seeking

Investments which firms hope will increase their efficiency by exploiting the benefits of economies of scale and scope, and also those of common ownership. It is suggested that this kind of Foreign Direct Investment comes after either resource or market seeking investments have been realized, with the expectation that it further increases the profitability of the firm. Usually, this kind of Foreign Direct Investment is mostly widely practiced between developed economies; especially those within closely integrated markets (e.g. the EU)

See also:

- The OLI Paradigm
- Multinational Corporation (MNC) and Multinational Corporations by country