Paper type: Essay Pages: 10 (2310 words)
Foreign direct investment (FDI) is direct investment into production or business in a country by a 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. Contents [hide] * 1 Definitions * 2 Types * 3 Methods * 4 Importance and barriers to FDI * 4.1 Foreign direct investment and the developing world * 4.
2 Difficulties limiting FDI * 5 Foreign direct investment by country * 5.1 Foreign direct investment in the United States * 5.2 Foreign direct investment in China * 5.3 Foreign direct investment in India * 5.3.1 2012 FDI reforms * 6 See also * 7 References * 8 External links
Foreign direct investment can take on many forms and so sometimes the term is used to refer to different kinds of investment activity. Commonly foreign direct investment includes “mergers and acquisitions, building new facilities, reinvesting profits earned from overseas operations and intracompany loans.” However, foreign direct investment is often used to refer to just building new facilities or greenfield investment, creating figures that although both labeled FDI, can’t be side by side compared.
As a part of the national accounts of a country, and in regard to the national income equation Y=C+I+G+(X-M), I is investment plus foreign investment, FDI refers to 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.
 It is the sum of equity capital, other long-term capital, and short-term capital as shown the balance of payments. It 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 excludesinvestment through purchase of shares. FDI is one example of international factor movements. foriegn direct investment is
nothing but inrease the country’s economy .
1. Horizon FDI arises when a firm duplicates its home country-based activities at the same value chain stage in a host country through FDI. 2. Platform FDI
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. 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.
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 * participating in an equity joint venture with another investor or enterprise Foreign direct investment incentives may take the following forms: * low corporate tax and individual income tax rates
* tax holidays
* other types of tax concessions
* preferential tariffs
* special economic zones
* EPZ – Export Processing Zones
* Bonded Warehouses
* investment financial subsidies
* soft loan or loan guarantees
* 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. This growth has not been matched by similar increases in per-capita income and access to the basics of modern life, like education, health care, or – for too many – even sanitary water and waste disposal. FDI has proven — when skillfully applied — to be one of the fastest means of, with the highest impact on, development. However, given its many benefits for both investing firms and hosting countries, and the large jumps in development were best practices followed, eking out advances with even moderate long-term impacts often has been a struggle. Recently, research and practice are finding ways to make FDI more assured and beneficial by continually engaging with local realities, adjusting contracts and reconfiguring policies as blockages and openings emerge.
Foreign direct investment and the developing world
A recent 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.  The Commitment to Development Index ranks the “development-friendliness” of rich country investment policies.
Difficulties limiting FDI
Foreign direct investment may be politically controversial or difficult because it partly reverses previous policies intended to protect the growth of local investment or of infant industries. When these kinds of barriers against outside investment seem to have not worked sufficiently, it can be politically expedient for a host country to open a small “tunnel” as a focus for FDI. The nature of the FDI tunnel depends on the country’s or jurisdiction’s needs and policies. FDI is not restricted to developing countries. For example, lagging regions in the France, Germany, Ireland, and USA have for a half century maintained offices to recruit and incentivize FDI primarily to create jobs. China, starting in 1979, promoted FDI primarily to import modernizing technology, and also to leverage and uplift its huge pool of rural workers.  To secure greater benefits for lesser costs, this tunnel need be focused on a particular industry and on closely negotiated, specific terms.
These terms define the trade offs of certain levels and types of investment by a firm, and specified concessions by the host jurisdiction. The investing firm needs sufficient cooperation and concessions to justify their business case in terms of lower labor costs, and the opening of the country’s or even regional markets at a distinct advantage over (global) competitors. The hosting country needs sufficient contractual promises to politically sell uncertain benefits—versus the better-known costs of concessions or damage to local interests. The benefits to the host may be: creation of a large number of more stable and higher-paying jobs; establishing in lagging areas centers of new economic development that will support attracting or strengthening of many other firms without so costly concessions; hastening the transfer of premium-paying skills to the host country’s work force; and encouraging technology transfer to local suppliers.
Concessions commonly offered include: tax exemptions or reductions; construction or cheap lease-back of site improvements or of new building facilities; and large local infrastructures such as roads or rail lines; More politically difficult (certainly for less-developed regions) are concessions which change policies for: reduced taxes and tariffs; curbing protections for smaller-business from the large or global; and laxer administration of regulations on labor safety and environmental preservation. Often these un-politick “cooperations” are covert and subject to corruption. The lead-up for a big FDI can be risky, fraught with reverses, and subject to unexplained delays for years.
Completion of the first phase remains unpredictable — even after the contract ceremonies are over and construction has started. So, lenders and investors expect high risk premiums similar to those of junk bonds. These costs and frustration have been major barriers for FDI in many countries. The value of FDI with some industries, some companies, and some countries much greater than with others; like most markets, valuations can be mostly perceptual. It is in the interest of both investors and recipients to dissemble the value of deals to their constituents, so the market on what’s hot and what’s not has frequent bubbles and crashes. Because local circumstances and the global economy vary so rapidly, Because valuations can shift dramatically in short times, negotiating and planning FDI is often quite irrational.
Foreign direct investment by country
There are multiple factors determining host country attractiveness in the eyes of large foreign direct institutional investors, notablypension funds and sovereign wealth funds. Research conducted by the World Pensions Council (WPC) suggests that perceived legal/political stability over time and medium-term economic growth dynamics constitute the two main determinants Some development economists believe that a sizeable part of Western Europe has now fallen behind the most dynamic amongst Asia’semerging nations, notably because the latter adopted policies more propitious to long-term investments: “Successful countries such as Singapore, Indonesia and South Korea still remember the harsh adjustment mechanisms imposed abruptly upon them by the IMF and World Bank during the 1997-1998 ‘Asian Crisis’ […]
What they have achieved in the past 10 years is all the more remarkable: they have quietly abandoned the “Washington consensus” [the dominant Neoclassical perspective] by investing massively in infrastructure projects […]: this pragmatic approach proved to be very successful.” The United Nations Conference on Trade and Development said that there was no significant growth of global FDI in 2010. In 2011 was $1,524 billion, in 2010 was $1,309 billion and in 2009 was $1,114 billion. The figure was 25 percent below the pre-crisis average between 2005 and 2007.
Foreign direct investment in the United States
Broadly speaking, the U.S. has a fundamentally open economy and very small barriers to foreign direct investment. The United States is the world’s largest recipient of FDI. 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.Research indicates 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.
 White House data reported in June 2011 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. President Barack Obama has said, “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.” Foreign direct investment in 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.During the global financial crisis FDI fell by over one-third in 2009 but rebounded in 2010. Foreign direct investment in India
Starting from a baseline of less than $1 billion in 1990, a recent 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. India disallowed overseas corporate bodies (OCB) to invest in India.
2012 FDI reforms
See also: Retailing in India
On 14 September 2012, Government of India allowed FDI in aviation up to 49%, in the broadcast sector up to 74%, in multi-brand retailup to 51% and in single-brand retail up to 100%. The choice of allowing FDI in multi-brand retail up to 51% has been left to eachstate. In its supply chain sector, the government of India had already approved 100% FDI for developing cold chain. This allows non-Indians to now invest with full ownership in India’s burgeoning demand for efficient food supply systems. The need to reduce waste in fresh food and to feed the aspiring demand of India’s fast developing population has made the cold supply chain a very exciting investment proposition. Foreign investment was introduced by Prime Minister Manmohan Singh when he was finance minister (1991) by the government of India as FEMA (Foreign Exchange Management Act). This has been one of the top political problems for Singh’s government, even in the current (2012) election.  
Definition of ‘Foreign Direct Investment – FDI’
An investment made by a company or entity based in one country, into a company or entity based in another country. Foreign direct investments differ substantially from indirect investments such as portfolio flows, wherein overseas institutions invest in equities listed on a nation’s stock exchange. Entities making direct investments typically have a significant degree of influence and control over the company into which the investment is made. Open economies with skilled workforces and good growth prospects tend to attract larger amounts of foreign direct investment than closed, highly regulated economies. Investopedia explains ‘Foreign Direct Investment – FDI’
The investing company may make its overseas investment in a number of ways – either by setting up a subsidiary or associate company in the foreign country, by acquiring shares of an overseas company, or through a merger or joint venture.
The accepted threshold for a foreign direct investment relationship, as defined by the OECD, is 10%. That is, the foreign investor must own at least 10% or more of the voting stock or ordinary shares of the investee company.
An example of foreign direct investment would be an American company taking a majority stake in a company in China. Another example would be a Canadian company setting up a joint venture to develop a mineral deposit in Chile.
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