A foreign direct investment involves a long-term relationship between an investor and a business. Under FDI, an investor based in one country invests in a business based in another country. This long-term relationship reflects a lasting interest in the business.
To uphold the lasting interest, the foreign investor is given at least 10 per cent voting rights in the day to day functioning of the firm. Therefore, under FDI, the investors holds a certain degree of influence on the management of the enterprise where the investment is being made.
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.
Foreign direct investment has three basic components:
EQUITY CAPITAL: it is the overseas investor’s purchase of shares of a business located in another country rather than its own. An equity capital stake of 10 percent or more, is normally considered as a threshold for the control of assets.
2. REINVESTED EARNINGS: it is the oversea investor’s share (in proportion to direct equity participation) of earnings not distributed as dividends by subsidiaries or associates, and earnings of branches not remitted to the direct investor.
3. Other direct investment capital or inter-company debt transactions: this refers to short- or long-term borrowing and lending of funds between direct investors (parent enterprises) and affiliate enterprises. The borrowing and lending of funds including debt securities and supplier’s credits between direct investors and subsidiaries, branches and associates.