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Table of Contents
What is Foreign Direct Investment (FDI)?
Foreign Direct Investment (FDI) represents cross-border investment where an individual or company from one country makes a substantial, long-term investment in a business located in another country. FDI goes beyond portfolio investment by granting control or significant influence over the foreign enterprise.
Definition
Foreign Direct Investment is an investment made by a firm or individual into business interests in another country with the intention of establishing lasting control or influence.
Table of Contents
- What is Foreign Direct Investment (FDI)?
- Key Takeaways
- Understanding Foreign Direct Investment
- Formula (If Applicable)
- Real-World Example
- Importance in Business or Economics
- Types or Variations
- Related Terms
- Sources and Further Reading
- Quick Reference
- Frequently Asked Questions (FAQs)
- Why do companies engage in FDI?
- Is FDI riskier than portfolio investment?
- Which countries attract the most FDI?
Key Takeaways
- FDI involves long-term investment and ownership control.
- It supports economic development, technology transfer, and global trade.
- Includes mergers, acquisitions, new facilities, and joint ventures across borders.
Understanding Foreign Direct Investment
FDI is a key driver of globalization and international economic integration. Governments encourage FDI because it brings capital, jobs, technology, and expertise.
FDI typically occurs in two forms:
- Greenfield investments: Building new operations from scratch.
- Brownfield investments: Acquiring or merging with existing businesses.
FDI flows are influenced by political stability, economic policy, market size, infrastructure, and regulatory frameworks. Investors seek countries with strong growth prospects and favorable business climates.
Formula (If Applicable)
FDI does not follow a single formula, but economic analysts track:
FDI Net Inflows:
FDI Inflows − FDI Outflows
FDI as % of GDP:
(FDI Inflows ÷ GDP) × 100
Real-World Example
In 2022, Tesla expanded its operations in Germany through a large-scale Greenfield investment. This FDI project created thousands of jobs, stimulated local supply chains, and strengthened Germany’s position in the electric vehicle industry.
Importance in Business or Economics
FDI contributes to:
- Economic growth and employment
- Transfer of innovation and technology
- Expansion of global value chains
- Improved productivity and competition
Countries use tax incentives, special economic zones, and regulatory reforms to attract FDI.
Types or Variations
Greenfield Investment: Establishing new facilities.
Brownfield Investment: Acquiring or merging with existing firms.
Horizontal FDI: Investing in the same business activity abroad.
Vertical FDI: Investing in supply-chain-related activities abroad.
Related Terms
- Globalization
- International Trade
- Multinational Corporation (MNC)
Sources and Further Reading
- United Nations Conference on Trade and Development (UNCTAD): https://unctad.org
- Organisation for Economic Co-operation and Development (OECD): https://www.oecd.org
- World Bank – FDI Data: https://www.worldbank.org
- Investopedia – FDI: https://www.investopedia.com/terms/f/fdi.asp
Quick Reference
- FDI is long-term cross-border investment granting ownership or influence.
- Occurs through Greenfield, Brownfield, or acquisition routes.
- Boosts economic development and global integration.
Frequently Asked Questions (FAQs)
Why do companies engage in FDI?
To access new markets, reduce costs, gain strategic assets, or diversify operations.
Is FDI riskier than portfolio investment?
Yes—FDI requires deeper commitment, operational involvement, and exposure to foreign risks.
Which countries attract the most FDI?
Typically large economies or those with strong stability, such as the U.S., China, Singapore, and the UAE.
