Foreign direct investment is a situation where a company in a country is controlled fully by another company in a different country. A foreign direct investment (FDI) can take an inorganic form (a company buys another company in the target country) or organic form (a company expands a business’ operations in a country). Things that can be counted as an FDI include intra company loans, profit reinvestment, establishing new facilities, acquisitions, and mergers.
An FDI is characterized by a business located in a country that controls ownership of another country’s enterprise. FDI and foreign portfolio investment are different. A foreign portfolio investment is a passive investment whose securities are supplied by another country such as bonds or public stocks. An FDI can be financed through several different methods such as payments in exchange for equity (machinery, technology, patents, etc.) or loans granted by the host country. An FDI can be determined using some distinct factors.
Said factors are as follows:
1) firm-specific advantages
2) removal of conflicts, and
3) the tendency to come up with a strategy of internalization in order that risk can perhaps be mitigated.
FDI itself can be divided into three types: horizontal, platform, and vertical. An FDI can function by:
1) incorporating a subsidiary or a company that is fully owner anywhere
2) acquiring the shares of an associated enterprise
3) merging with or acquiring an unrelated enterprise, and
4) participating in a joint venture of equity with another enterprise or investor.
An FDI can take a lot of forms such as for example derogation from regulations, energy, R&D support, infrastructure subsidies, relocation & expatriation, free land & land subsidies, investment financial subsidies, maquiladoras, bonded warehouses, export processing zones, special economic zones, preferential tariffs, tax concessions, tax holidays, low corporate tax, and individual income tax rates.