Foreign direct investment (FDI) is a direct investment into
production or business in a country by an individual or company in another
country, either by buying a company in the target country or by expanding
operations of an existing business in that country. Foreign direct investment
is in contrast to portfolio investment which is a passive investment in
the securities of another country such as stocks and bonds.
Definitions
Broadly, foreign direct investment includes "mergers
and acquisitions, building new facilities, reinvesting profits earned from
overseas operations and intra company loans".[1] In a narrow sense, foreign direct investment refers just to
building new facilities. The numerical FDI figures based on varied definitions
are not easily comparable.
As a part of the national accounts of a country, and in
regard to the GDP equation Y=C+I+G+(X-M), I is investment plus foreign
investment, FDI is defined as the net inflows of investment (inflow minus
outflow) to acquire 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, other long-term capital, and
short-term capital as shown the balance of payments. FDI usually involves participation
in management, joint-venture, transfer
of technology
and expertise. There are two types of FDI: inward and outward, resulting in a net FDI inflow (positive or negative) and "stock of foreign direct
investment", which is the cumulative number for a given period. Direct
investment excludes investment through purchase of shares.[3] FDI is one example of international
factor movements
Types
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.[4]
2. Platform FDI Foreign direct
investment from a source country into a destination country for the purpose of
exporting to a third country.
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.[4]
Horizontal FDI decreases international trade as the product
of them is usually aimed at host country; the two other types generally act as
a stimulus for it.[citation needed]
Methods
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
Forms of FDI
•
other
types of tax concessions
•
investment
financial subsidies
•
free
land or land subsidies
•
relocation
& expatriation
•
infrastructure
subsidies
•
R&D
support
•
derogation
from regulations (usually for very large projects)
Importance and barriers to FDI
The rapid growth of world population since 1950 has occurred
mostly in developing countries[citation needed]. 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. While the quality of
the data from 1950 may be of question, taking the average across a range of
estimates confirms this. Only war-torn and countries with other serious
external problems, such as Haiti, Somalia, and Niger have not registered
substantial increases in GDP per capita. The data available to confirm this are
freely available.[6]
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.[7] The local population may be able to
benefit from the employment opportunities created by new businesses.[8]
Developing world
A 2010 meta-analysis of the effects of foreign direct
investment on local firms in developing and transition countries suggests that
foreign investment robustly increases local productivity growth. [9] The Commitment
to Development Index
ranks the "development-friendliness" of rich country investment policies.
China
FDI in China, also known as RFDI (renminbi foreign direct
investment), has increased considerably in the last decade, reaching $59.1
billion in the first six months of 2012, making China the largest recipient of
foreign direct investment and topping the United States which had $57.4 billion
of FDI.[10]
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.[12]HYPERLINK \l "[13] India disallowed overseas corporate
bodies (OCB) to invest in India.[14] India imposes cap on equity holding by foreign investors in
various sectors, current FDI limit in aviation sector is maximum 49%.[15]
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.[1]
United States
Broadly speaking, the U.S. has a fundamentally 'open economy' and low barriers to foreign direct
investment.[16]
U.S. FDI totaled $194 billion in 2010. 84% of FDI in the
U.S. in 2010 came from or through eight countries: Switzerland, the United
Kingdom, Japan, France, Germany, Luxembourg, the Netherlands, and Canada.[17] 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.[18]
White House data reported in July 1991 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. workforce.[16]
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."[16]
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 would which direct the United States Department of Commerce to "conduct a review of the
global competitiveness of the United States in attracting foreign direct
investment."[19] Supporters of the bill argued that
increased foreign direct investment would help job creation in the United
States.[20]
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