Foreign direct investment
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Reverted edits by [[Special:Contributions/117.98.111.68|117.98.111.68]] to last version by 218.186.182.238 (using [[WP:HG|Huggle]])
{{otheruses4|economics|the magazine|FDi magazine}}
'''Foreign direct investment (FDI)''' in its classic definition, is defined as a company from one country making a physical investment into building a factory in another country. Its definition can be extended to include investments made to acquire lasting interest in enterprises operating outside of the economy of the investor.<ref>''Foreign Direct Investment'', United Nations Conference on Trade and Development, www.unctad.org</ref> The FDI relationship consists of a parent enterprise and a foreign affiliate which together form a Multinational corporation (MNC). In order to qualify as FDI the [[investment]] must afford the parent enterprise ''control'' over its foreign affiliate. The [[UN]] defines control in this case as owning 10% or more of the ordinary shares or voting power of an [[Incorporation (business)|incorporated]] firm or its equivalent for an unincorporated firm; lower ownership shares are known as [[portfolio investment]].
==History==
In the years after the Second World War global FDI was dominated by the United States, as much of the world recovered from the destruction brought by the conflict. The US accounted for around three-quarters of new FDI (including reinvested profits) between 1945 and 1960. Since that time FDI has spread to become a truly global phenomenon, no longer the exclusive preserve of [[OECD]] countries. FDI has grown in importance in the global economy with FDI stocks now constituting over 20 percent of global GDP.{{Fact|date=April 2008}}
==Types of FDI==
===By Direction===
====Inward====
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Inward foreign direct investment (inbound) is a particular form of [[inward investment]] when foreign capital is invested in local resources.
'''Inward FDI is encouraged by:'''
* Tax breaks, subsidies, low interest loans, grants, lifting of certain restrictions
* The thought is that the long term gain is worth more than the short term loss of income
'''Inward FDI is restricted by:'''
* Ownership restraints or limits
* Differential performance requirements
====Outward====
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Outward foreign direct investment, sometimes called "direct investment abroad", is when local capital is invested in foreign resources. Yet it can also be used to invest in imports and exports from a foreign commodity country.
'''Outward FDI is encouraged by:'''
* Government-backed insurance to cover risk
'''Outward FDI is restricted by:'''
* Tax incentives or disincentives on firms that invest outside of the home country or on repatriated profits
* Subsidies for local businesses
* Government policies that support the nationalization of industries (or at least a modicum of government control)
* Self-interested lobby groups and societal sectors who are supported by inward FDI or state investment, for example labour markets and agriculture.
* Security industries are often kept safe from outwards FDI to ensure localised state control of the military industrial complex
===By Target===
====Greenfield investment====
{{main|Greenfield investment}}
Direct investment in new facilities or the expansion of existing facilities. Greenfield investments are the primary target of a host nation’s promotional efforts because they create new production capacity and jobs, transfer technology and know-how, and can lead to linkages to the global marketplace. The Organization for International Investment cites the benefits of greenfield investment (or insourcing) for regional and national economies to include increased employment (often at higher wages than domestic firms); investments in research and development; and additional capital investments. Criticism of the efficiencies obtained from greenfield investments include the loss of market share for competing domestic firms. Another criticism of greenfield investment is that profits are perceived to bypass local economies, and instead flow back entirely to the multinational's home economy. Critics contrast this to local industries whose profits are seen to flow back entirely into the domestic economy.
====Horizontal FDI====
Horizontal FDI occurs when the multinational undertakes the same production to activities in multiple countries.
====Vertical FDI====
Vertical FDI occurs when the multinational acquires a stake in a foreign firm that either uses its output or provides its input. The primary activity of the foreign firm usually precedes or succeeds that of the parent company.
=====Backward Vertical FDI=====
Investment in a firm whose industry output provides the input for the parent company's operations.
=====Forward Vertical FDI=====
Where an industry abroad sells the outputs of a firm's domestic production, or uses the firm's output as input.
===By Motive===
FDI can also be categorized based on the motive behind the investment from the perspective of the investing firm:
====Resource-Seeking====
Investments which seek to acquire factors of production that are more efficient than those obtainable in the home economy of the firm. In some cases, these resources may not be available in the home economy at all (e.g. cheap labor and natural resources). This typifies FDI into developing countries, for example seeking natural resources in the Middle East and Africa, or cheap labor in Southeast Asia and Eastern Europe.
====Market-Seeking====
Investments which aim at either penetrating new markets or maintaining existing ones. FDI of this kind may also be employed as defensive strategy;<ref><small> Knickerbocker identified this phenomenon in his ‘follow-my-leader’ hypothesis in: Knickerbocker, F. T. (1973). Oligopolistic reaction and multinational enterprise. Boston(Mass.), Division of Research Graduate School of Business Administration Harvard University.</small></ref> it is argued that businesses are more likely to be pushed towards this type of investment out of fear of losing a market rather than discovering a new one.<ref name=Dunning (1993)><small> Dunning, J. H. (1993). Multinational enterprises and the global economy. Wokingham, England ; Reading, Mass, Addison-Wesley</small></ref> This type of FDI can be characterized by the foreign [[Mergers and acquisitions|Mergers and Acquisitions]] in the 1980’s by Accounting, Advertising and Law firms.<ref><small> Dunning, J. H., B. Kogut and M. Blomstrom (1990). Globalization of firms and the competitiveness of nations. Lund, Institute of Economic Research Lund University ; Bromley : Chartwell-Bratt c1990</small></ref>
====Efficiency-Seeking====
Investments which firms hope will increase their efficiency by exploiting the benefits of [[economies of scale]] and [[economies of scope|scope]], and also those of common ownership. It is suggested that this type of FDI comes after either resource or market seeking investments have been realized, with the expectation that it further increases the profitability of the firm.<ref name=Dunning (1993)> Dunning, J. H. (1993). Multinational enterprises and the global economy. Wokingham, developed economies; especially those within closely integrated markets (e.g. the EU).<ref name=Dunning (1993)> Dunning, J. H. (1993)</ref>.
====Strategic-Asset-Seeking====
A tactical investment to prevent the gain of resource to a competitor. Easily compared to that of the oil producers, whom may not need the oil at present, but look to prevent their competitors from having it.
==Opposition==
In the US, in the late 1960s and early 1970s, foreign direct investment became increasingly politicized. [[Organized labor]], convinced that foreign investment exported jobs, undertook a major campaign to reform the tax provisions which affected foreign direct investment. The Foreign Trade and Investment Act of 1973 (or the Burke-Hartke Bill) would have eliminated both the tax credit and tax deferral. The Nixon Administration, influential members of Congress of both parties, and well-financed lobbying organizations came to the defense of the multinational. The massive counterattack of the multinational corporations and their allies defeated this first major challenge to their interests.<ref>Gilpin, R. (1986) U.S. Power and the Multinational Corporation- The Political Economy of Foreign Direct Investment. New York: Basica Books, Inc., Publishers</ref>
==See also==
* [[List of countries by received FDI]]
* [[International investment position]]
* [[Bilateral Investment Treaty]]
* [[Multilateral Agreement on Investment]]
* [[Multilateral Investment Guarantee Agency]]
* [[International Centre for Settlement of Investment Disputes]]
* [[Foreign Affiliate Trade Statistics]]
* [[World Association of Investment Promotion Agencies]]
* [[Investment promotion agency]]
* [[External Commercial Borrowing]]s
* [[:Category:International trade organizations|Articles on international trade organizations]]
* [[The Leading Authority on FDI : http://www.fdiintelligence.com/]]
==References==
{{reflist}}
==External links==
* [http://www.fdi.net FDI.net] - foreign direct investment information portal of the World Bank Group
* [http://www.oecd.org/investment OECD work on international investment]
* [http://www.unctad.org/wir World Investment Report (UNCTAD)]
* [http://www.unece.org/stats/data.htm UNECE Database with Historical Trade data ]
* [http://www.earthsummit2002.org/es/issues/FDI/fdi.PDF FDI: A lead driver for Sustainable Development? (Earth Summit 2002)]
* [http://www.ofii.org/ Organization for International Investment]
Leading Authority on FDI : http://www.fdiintelligence.com/
[[Category:International factor movements]]
[[Category:International economics]]
[[Category:Macroeconomics]]
[[Category:Development]]
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