From Wikipedia, the free encyclopedia

Foreign direct investment (FDI) refers to long term participation by country A into country B. It usually involves participation in management, joint-venture, transfer of technology and "know-how". There are two types of FDI: inward foreign direct investment and outward foreign direct investment, resulting in a net FDI inflow (positive or negative).

History

Foreign direct investment (FDI) is a measure of foreign ownership of productive assets, such as factories, mines and land. Increasing foreign investment can be used as one measure of growing economic globalization. Figure below shows net inflows of foreign direct investment as a percentage of gross domestic product (GDP). The largest flows of foreign investment occur between the industrialized countries (North America, Western Europe and Japan). But flows to non-industrialized countries are increasing sharply.

US International Direct Investment Flows:^[1]

Types

A foreign direct investor may be classified in any sector of the economy and could be any one of the following:^{[citation needed]}

• an individual;
• a group of related individuals;
• an incorporated or unincorporated entity;
• a public company or private company;
• a group of related enterprises;
• a government body;
• an estate (law), trust or other societal organisation; or
• any combination of the above.

Methods

The foreign direct investor may acquire 10% or more of the voting power of an enterprise in an economy through any of the following methods:

• by incorporating a wholly owned subsidiary or company
• by acquiring shares in an associated enterprise
• through a merger or an acquisition of an unrelated enterprise
• participating in an equity joint venture with another investor or enterprise

Foreign direct investment incentives may take the following forms:^{[citation needed]}

• low corporate tax and income tax rates
• tax holidays
• other types of tax concessions
• preferential tariffs
• special economic zones
• investment financial subsidies
• soft loan or loan guarantees
• free land or land subsidies
• relocation & expatriation subsidies
• job training & employment subsidies
• infrastructure subsidies
• R&D support
• derogation from regulations (usually for very large projects)

Debates about the benefits of FDI for low-income countries

Some countries have put restrictions on FDI in certain sectors. India, with its restriction on FDI in the retail sector is a good example. ^[2] In a country like India, the “walmartization” of the country could have significant negative effects on the overall economy by reducing the number of people employed in the retail sector (currently the second largest employment sector nationally) and depressing the income of people involved in the agriculture sector (currently the largest employment sector nationally). ^[3]

Foreign direct investment in the United States

With the worst recession in the last 75 years and recovery still in the process, the United States has adopted a wide open economy and is welcoming foreign direct investment (FDI). "Invest in America" is an initiative of the Commerce department and aimed to promote the arrival of foreigners investors to the country. ^[4]

The “Invest in America” policy is focused on:

• Facilitating investor queries.
• Carrying out maneuvers to aid foreign investors.
• Provide support both at local and state levels.
• Address concerns related to the business environment by helping as an ombudsman in Washington Dc for the international venture community.
• Offering policy guidelines and helping getting access to the legal system.

The United States is world's largest beneficiary of FDI. The $2.1 trillion stock of foreign investment in America at the end of 2008 corresponds to approximately 16% of U.S. gross domestic product.

Benefits of FDI in America: In the last 6 years, over 4000 new projects and 630,000 new jobs have been created by foreign companies, resulting in close to $314 billion in investment. Unarguably, US affiliates of foreign companies have a history of paying higher wages than US corporations. Foreign companies have in the past supported an annual US payroll of $364 billion with an average annual compensation of $68,000 per employee.

Increased US exports through the use of multinational distribution networks. FDI has resulted in 30% of jobs for Americans in the manufacturing sector, which accounts for 12% of all manufacturing jobs in the US.^[5]

Affiliates of foreign corporations spent more than $34 billions on research and development in 2006 and continue to support many national projects. Inward FDI has led to higher productivity through increased capital, which in turn has led to high living standards. ^[6]

Foreign direct investment in China

No one disputes the fact that FDI in China has been one of the major successes of the past 3 decades. Starting from a baseline of less than $19 billion just 20 years ago, FDI in China has grew to over $300 billion in the first 10 years. China has continued its massive growth and is the leader among all developing nations in terms of FDI. Today, FDI in China continues to increase as the country rapidly attains its pre-recession status as the dominant economic power. Even though there was a slight dip in FDI in 2009 as a result of the global slowdown, 2010 has again seen investments increase. The Chinese continue to steam roll with expectations of an economic growth of a 10% this year. ^[7]

References

External links

• UNCTAD FDI Statistics