What Is an Outward Direct Investment (ODI)?

An outward direct investment (ODI) is a business strategy in which a domestic firm expands its operations to a foreign country.

ODI can take many different forms depending on the company. For example, some companies will make a green field investment, which is when a parent company creates a subsidiary in a foreign country. A merger or acquisition can also occur in a foreign country (and so may be considered an outward direct investment). Finally, a company may decide to expand an existing foreign facility as part of an ODI strategy. Employing ODI is a natural progression for firms if their domestic markets become saturated and better business opportunities are available abroad.

Key Takeaways

  • An outward direct investment (ODI) is a business strategy in which a domestic firm expands its operations to a foreign country.
  • Employing outward direct investment (ODI) is a natural progression for firms if their domestic markets become saturated and better business opportunities are available abroad.
  • American, European, and Japanese firms have long made extensive investments outside their domestic markets.

ODI is also called outward foreign direct investment or direct investment abroad.

Understanding Outward Direct Investment (ODI)

The extent of a nation's outward direct investment can be seen as an indication that its economy is mature. ODI has been shown to increase a country’s investment competitiveness and has proven to be crucial for long-term, sustainable growth. American, European, and Japanese firms, for example, have long made extensive investments outside their domestic markets.

Because of their more rapid growth rates, emerging market economies often receive large amounts of ODI, as China has for the past two decades. In 2019, China was the second-largest recipient of foreign investment. But even some emerging market countries have begun to make investments abroad.

In 2015, Chinese overseas investment exceeded foreign direct investment (FDI) in China for the first time ever. In 2016, China's ODI peaked: Chinese companies invested over $170 billion overseas. Starting in 2017, ODI began a downtrend that has continued. In 2018, China's inflow of foreign direct investment (FDI) exceeded its ODI once again (making the country a net debtor once again.)

It is important to make a distinction between outward direct investment (ODI) and foreign direct investment (FDI). FDI occurs when a non-resident invests in the shares of a resident company. ODI occurs when a resident company invests in a wholly-owned subsidiary or a joint venture in a non-resident country as part of a strategy to expand their business.

In 2019, China’s ODI declined 8.2%, to $110.6 billion. In yuan terms, it declined by 6%, to 807.95 billion yuan in 2019. The majority of China's ODI is inflows to rental and commercial services, manufacturing, distribution, and retail. Starting in 2016, Beijing started tightening its capital controls. As a result, many of China's overseas projects have been scaled back. These restrictive measures were intended to curb capital flight—when assets or money rapidly flow out of a country. At the same time, the domestic economic downturn in China, primarily due to the lingering impacts of the trade war with the U.S., has also hindered Chinese ODI. Because of sluggish domestic growth, investment in foreign assets became less appealing. Previously, foreign investment by Chinese firms has been a significant driver of global asset prices, mostly as a result of the sale of property and mergers and acquisitions.