Chapter 4
Foreign Investment and Trade
Foreign direct investment is when an investor based in one country, the home country, acquires an asset in another country, the host country, with the intent to manage the asset. The management part is what distinguishes FDI from other investments like portfolio investment in foreign stocks, bonds and other financial instruments. There are three main categories of FDI. The first category is equity capital which is the value of the multinational corporation’s investment in shares of an enterprise in a foreign country. There needs to be an equity capital stake of ten percent or more of shares or voting power in the corporation. An example of equity capital is a merger, acquisition or Greenfield investment (creating a new facility). Mergers and acquisitions are an important source of FDI for developed countries. The second category is reinvested earnings which is the multinational corporation’s share of affiliate earnings not distributed as dividends or remitted to the multinational corporations. Retained profits by the affiliates are assumed to be reinvested. The third category is other capital which is short or long-term borrowing and lending of funds between a multinational corporation and an affiliate.
Foreign direct investment has become a very important topic. The main reason is the dramatic increase in the annual global flow of goods. Annual FDI global inflows are at about $1.5 trillion U.S. dollars currently and about twenty years ago it was roughly $60 billion U.S. dollars. Foreign direct investment plays an extraordinary and growing role in global business today. It helps provide businesses with new markets, new marketing channels, cheaper production facilities, access to new technologies and products, and gain new skills and financing. Other
benefits for companies making FDI are that they can avoid foreign government pressure for local production and they can circumvent trade...