Understanding Foreign Direct Investment for Economic Growth – Companies open a new branch or factory in a new place, even country or continent. They invest capital, money, technology, human resources, and support to ensure a business will work as it supposed to be. Investing in a different country is not an easy task because they must follow regulation and law. In simple terms, this type of investment is commonly called as FDI or foreign direct investment. This is no longer a small transaction or purchase between one company and another. On the contrary, this investment will make country, government, and companies to be in similar interest.
Foreign direct investment is the form of investment that a company or business entity does in a country that different from its origin. For example, a company is based on Germany and invests in France. This type of investment is not just sending money because the company also involves in direct business. New stores and braches are the simplest examples of FDI. In a real situation, FDI has many forms not just selling products at the store. On the contrary, merger and acquisition are other methods that most companies consider when deciding to invest without much problem. Opening a new business in a different country takes time with high risk and spending unnecessary capital.
Instead of similar business entities, companies choose a merger or just buying stock from the partner. A joint venture is another of FDI because two companies do business together as one entity. Both have the same goals and purposes regardless of background because an agreement for a joint venture must be valid. One company is from foreign and the rest is local. Therefore, both have control and resource to do business.
Foreign direct investment is different from an investment that only happens in the stock market and exchange. When investors or companies from foreign countries buy stocks, they only have a portion of capital but not part of management. This type of investment is mostly called foreign portfolio investment. Buying stocks does not mean they have control over the company because the market has a limitation. On the contrary, direct investment makes the company has a high level of control including voting. Each country has different regulations regarding how much percentage that foreign company and business entity can have. As long as investors have voting and involve in business operations, this investment is definitely FDI.
From this point, a simple way to identify FDI is from how much control investors have and the level of support regarding business operation. More control means the company must support with resources and technology. People must know that information part before go further exploring foreign direct investment.