Foreign Direct Investment (FDI)

A system of laws, regulations, and institutions that regulates the treatment of direct investment from outside the country.

Foreign direct investment is a category of investment where an entity from one country controls an enterprise in a different country through equity capital, reinvested earnings, or intra-company loans. FDI can be mutually beneficial to both the investor and to the country in which the investor invests. Foreign direct investment in Lebanon

The overarching incentive for the investor is to maximize profit by expanding into new markets not already saturated, improving efficiency by reducing production costs, or tapping into raw materials and other resources previously undiscovered. For the FDI beneficiaries, incentives include the transfer of innovative production techniques, advanced technologies, marketing expertise, and other such knowledge transfers, in addition to the actual funds invested. Increased FDI may also improve a developing country’s access to foreign markets.

Although profit is the driving force for investors, they also consider other incentives when deciding where to invest. The establishment of an unambiguous and accessible rule of law, efficient judicial and regulatory processes, low corruption and related institutional reform, and overall economic reforms are four areas that are critical to the competitiveness of countries in attracting FDI. Trends have shown that investors also consider the following incentives/disincentives: domestic market size, regional market access, growth history, political and social stability, stable and convertible national currency, limited foreign exchange restrictions, freedom to acquire ownership and effective control, and adequate investment and property rights protection.

Foreign Direct Investment in International Trade

Meaning of FDI (Foreign Direct Investment), according to the Dictionary of International Trade (Global Negotiator): The controlling ownership in a business enterprise in one country by an entity based in another country. According to balance of payment criteria., Foreign Direct Investment includes mergers and acquisitions, building new facilities, reinvesting profits earned from overseas operations and intra company loans.

Summary of Direct Foreign Investment

The acquisition abroad of specific productive resources such as mines, factories, or transport facilities. For an investment to be considered direct, it must be of such magnitude as to give the investor actual control or significant influence over the foreign operation. The U.S. government regards control of 10 percent or more of the voting stock of a foreign operation indicative of such influence or control. Investments in foreign operations where influence is limited are said to be portfolio rather than direct investments since the investor does not take an active part in management of the foreign entity. (Main Author: William J. Miller)

Foreign Direct Investment and International Trade Economy

In relation to international trade economy, Christopher Mark (1993) provided the following definition of Direct Foreign Investment: The acquisition of productive resources such as factories, mines, or transport facilities in a foreign country. For an investment to be considered “direct,” it must be large enough to give the investor control or significant influence over the foreign operation. (Under US Commerce Department regulations, the threshold for such a determination is acquisition of 10 percent or more of the voting stock or capital in a foreign venture.) Investments falling below the threshold of active participation in management of the foreign entity are regarded as “portfolio” investments.

Foreign Direct Investment in International Trade

Meaning of Direct Foreign Investment, according to the Dictionary of International Trade (Global Negotiator): Investment that is made to acquire a lasting interest in a enterprise operating in an economy other than of the investor. In most countries, direct investment is defined for statistical purposes as the ownership or control, directly or indirectly, by one person or company of, at least, 10 percent of the capital.

Net Inflows of Foreign Direct Investment (in the Human Development Area)

In this context, Net Inflows of Foreign Direct Investment means: net inflows of investment to acquire a lasting management interest (10% or more of voting stock) in an enterprise operating in an economy other than that of the investor. It is the sum of equity capital, reinvestment of earnings, other long-term capital and short-term capital.

Brazil FDI Incentives and Reforms

Since the late 1990s to 2004, Foreign Direct Investment in Brazil has decreased from approximately $30 billion to $10 billion, following the regional trend of Foreign Direct Investment flight. In response, Brazil passed a Public-Private Partnership law guaranteeing returns on investments in national infrastructure projects. This incentive initiative was passed on the heels of other key institutional and legal reforms, including tax reforms, social security reforms, and a new bankruptcy law. Also, Brazil is taking steps to reduce bureaucratic red-tape in environmental procedures by including officials from the environmental ministry at the earliest possible stage, to identify and address concerns in advance.

Resources

See Also

transnational corporations, foreign investments, TNCs, FDIs, international political economy, development, international agreements, developed countries

Further Reading

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