Loading the player...

What is 'Foreign Direct Investment - FDI'

Foreign direct investment (FDI) is an investment made by a company or individual in one country in business interests in another country. Generally, FDI takes places when an investor establishes foreign business operations or acquires foreign business assets, including establishing ownership or controlling interest in a foreign company. Foreign direct investments are distinguished from portfolio investments in which an investor merely purchases equities of foreign-based companies.

BREAKING DOWN 'Foreign Direct Investment - FDI'

Foreign direct investments are commonly made in open economies that offer a skilled workforce and above-average growth prospects for the investor, as opposed to tightly regulated economies. Foreign direct investment frequently involves more than just a capital investment. It may include provisions of management or technology as well. The key feature of foreign direct investment is that it is an investment made that establishes either effective control of, or at least substantial influence over, the decision-making of a foreign business.

The Bureau of Economic Analysis (BEA), which tracks expenditures by foreign direct investors into U.S. businesses, reported total FDI into U.S. businesses of $373.4 billion in 2016, marking a 15% decrease from the prior year. As per usual, acquisitions made up the overwhelming majority of new foreign direct investments into the U.S., totaling $365.7 billion. Meanwhile, greenfield investments, a type of FDI defined by the BEA as investments to either establish a new business or to expand an existing foreign-owned business, comprised a much lighter $7.7 billion.

Methods of Foreign Direct Investment

Foreign direct investments can be made in a variety of ways, including the opening of a subsidiary or associate company in a foreign country, acquiring a controlling interest in an existing foreign company, or by means of a merger or joint venture with a foreign company.

The threshold for a foreign direct investment that establishes a controlling interest, per guidelines established by the Organisation of Economic Co-operation and Development (OECD), is a minimum 10% ownership stake in a foreign-based company. However, that definition is flexible, as there are instances where effective controlling interest in a firm can be established with less than 10% of the company's voting shares.

Types of Foreign Direct Investment

Foreign direct investments are commonly categorized as being horizontal, vertical or conglomerate in nature. A horizontal direct investment refers to the investor establishing the same type of business operation in a foreign country as it operates in its home country, for example, a cell phone provider based in the United States opening up stores in China. A vertical investment is one in which different but related business activities from the investor's main business are established or acquired in a foreign country, such as when a manufacturing company acquires an interest in a foreign company that supplies parts or raw materials required for the manufacturing company to make its products.

A conglomerate type of foreign direct investment is one where a company or individual makes a foreign investment in a business that is unrelated to its existing business in its home country. Since this type of investment involves entering an industry the investor has no previous experience in, it often takes the form of a joint venture with a foreign company already operating in the industry.

Examples of Foreign Direct Investment's Impact

Foreign direct investments and the laws governing them can be pivotal to a company's growth strategy. In 2017, for example, U.S.-based Apple announced a $507.1 million investment to boost its research and development work in China, Apple's third-largest market behind the Americas and Europe. The announced investment relayed CEO Tim Cook's bullishness toward the Chinese market despite a 12% year-over-year decline in Apple's Greater China revenue in the quarter preceding the announcement. China's economy has been fueled by an influx of FDI targeting the nation's high-tech manufacturing and services, which according to China's Ministry of Commerce, grew 11.1% and 20.4% year over year, respectively, in the first half of 2017. Meanwhile, recently relaxed FDI regulation in India now allows 100% foreign direct investment in single-brand retail without government approval. The regulatory decision reportedly facilitates Apple's desire to open a physical store in the Indian market, where the firm's iPhones have thus far only been available through third-party physical and online retailers.

  1. Foreign Investment

    Flows of capital from one nation to another in exchange for significant ...
  2. Foreign Tax Credit

    A non-refundable tax credit for income taxes paid to a foreign ...
  3. Foreign Earned Income Exclusion

    The amount of income earned from a foreign source that is excludable ...
  4. Foreign Exchange Reserves

    Foreign exchange reserves are reserve assets held by a central ...
  5. Limited Convertibility

    A situation in which government regulations prevent the free ...
  6. Foreign Tax Deduction

    One of the itemized deductions that may be taken for taxes paid ...
Related Articles
  1. Investing

    Investing Beyond Your Borders

    Investing abroad poses risks, but can also help you diversify. Discover ways to invest in foreign stocks.
  2. Insights

    Cautionary Signs For International Investors

    "Going global" is a fashionable investing style, but investors should know the risks.
  3. Taxes

    Understanding taxation of foreign investments

    Any interest, dividends and capital gains are subject to U.S. tax, but the foreign tax credit enables you to deduct most of the tax you've paid abroad.
  4. Insights

    Top 6 Factors That Drive Investment In China

    FDI in China surpassed $100 billion in 2010, certain key factors drive foreign direct investment.
  5. Investing

    Foreign savings accounts: Should you open one?

    Find out whether opening a savings account in a foreign bank might make sense for your money. Learn the pros and cons – as well as how to establish one.
  6. Taxes

    How to Reduce U.S. Taxes on Foreign Income

    IRS rules allow for a few ways to reduce taxes on foreign-earned income.
  7. Investing

    How To Trade Foreign Stocks

    We weigh the major ways to trade foreign stocks for investors.
  8. Investing

    Understanding Capital And Financial Accounts In The Balance Of Payments

    The current, capital and financial accounts compose a nation's balance of payments, indicating the state of its economy and economic outlook.
  9. Managing Wealth

    Here's How To Tap International Markets (PBR, VALE)

    Access to foreign markets has grown a lot in recent years, allowing US market players to trade these bourses in real-time.
  10. Trading

    Exploring Non-Dollar Currencies For Forex Trading

    Learn how investments in foreign currencies can diversify your portfolio.
  1. What is the difference between foreign portfolio investment and foreign direct investment?

    Learn about the significant differences between foreign direct investment and foreign portfolio investment as well as how ... Read Answer >>
  2. How can an individual investor get involved in FDIs (foreign direct investments) ...

    Learn about what economists call foreign direct investment, and find out why individual investors may find it difficult to ... Read Answer >>
Hot Definitions
  1. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  2. Standard Deviation

    A measure of the dispersion of a set of data from its mean, calculated as the square root of the variance. The more spread ...
  3. Entrepreneur

    An entrepreneur is an individual who founds and runs a small business and assumes all the risk and reward of the venture.
  4. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  5. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
  6. Compound Interest

    Compound Interest is interest calculated on the initial principal and also on the accumulated interest of previous periods ...
Trading Center