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Methods of Foreign Direct Investment- Explained

Methods of Foreign Direct Investment- Explained

Foreign direct investment is when an investor living in one country invests in a business based in another country. Under FDI, the foreign investor (individual or business) owns 10 per cent of the company where the investment is being made. If the investor owns less than 10 per cent, the International Monetary Fund (IMF) defines it as part of his or her stock portfolio.

As per the international guidelines based on the recommendations by the IMF in its Balance of Payments Manual (fifth editions, 1993) Foreign Direct Investment is defined as international investment that reflects the objective of a resident entity in one economy (foreign direct investor or parent enterprise) obtaining a lasting interest and control in an enterprise resident in an economy other than that of the foreign direct investor.

FDI is a critical driver of economic growth for developing economies. Overseas investment is more than just the transfer of money from one country to another, it also: 1) diversifies investors portfolio, 2) promotes stable longterm lending, 3) provides technology to developing nations, 4) generates employment by creating more job opportunities, 5) brings in managerial expertise, 5) improves existing infrastructure, 6) increases return without increasing risk.

There are two menthol’s of foreign direct investment, namely: Greenfield and brownfield investment.

GREENFIELD INVESTMENT: Under this type of investment, a foreign company builds up their own factory or company in a different or the host country, where they train people to work in their organization. For example Burger King opening up its chain in India. This is an example of FDI in India.

BROWNFIELD INVESTMENT: Under this type of investment, the foreign investor doesn’t build a company from scratch in another country but expand their existing business in the host country by the means of cross border mergers and acquisitions. This allows the foreign investor to set up their operations in the host country immediately.

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