Foreign Direct Investment
Direct investment is one that gives the investor a controlling interest in a foreign company. Such a direct investment also is called a foreign direct investment (FDI).
FDI may include the building of a new plant on a greenfield site or as a take-over or merger.
The European Commission defines FDI as “the establishment or acquisition of income generating assets in a foreign country over which investment firm has control.”
FDI involves a strategic decision on the part of a company.
Its basic purpose is of course to generate a financial return, like portfolio investment, but the means of doing so and the implications for the company and the host country are quite different.
FDI is a form of market entry strategy and the one which involves the highest risks, but it enables the investor to retain control over its foreign operations.
When two or more companies share ownership of an FDI, the operation is called a joint venture.
When a government joins a company in an FDI, the operation is called a mixed venture, which is also a type of joint venture.
Key features
‘Control’ would normally imply not only the ownership of shares in an operation but also some degree of management control.
This may include a joint venture, especially where the company in question has a majority shareholding, as in the case of Volkswagen in its joint venture with Skoda. Volkswagen has a 70% shareholding and management control of Skoda.
However, there is no generally agreed definition of ‘control’. The IMF uses the ‘significant degree of influence’, which may imply a stake of less than 50%.
Factors influencing FDI
Supply factors
-Production costs
-Logistics
-Resource availability
-Access to technology
Demand factors
-Customer access
-Marketing advantage
-Exploitation of competitive advantage
-Customer mobility
Political factors
-Avoidance of trade barriers
-Economic development incentives...