DEFINITION

 foreign direct investment or FDI is the practice of investing in businesses in foreign

countries in other words foreign direct investment occurs when a firm invests directly in
facilities to produce or market goods or services in a foreign country
 foreign direct investment or FDI refers to a long-term investment by an investor in an
enterprise in another economy resulting in lasting interest with significant influence over
the overseas enterprise

3 common types of FDI

 Mergers - a business transaction where two or more companies combine to form a
single new company
 Acquisitions - when one company purchases a majority stake in another company. The
acquiring company must purchase more than 50% of the target company's stock and
assets.
 Partnerships - a business structure where two or more people agree to share the profits
and losses of a business.

Classification
 Direct investor
 Direct investment enterprise
the investor is known as the direct investor while the overseas enterprise is known as the direct
investment enterprise

Types and Examples of Foreign Direct Investment

Horizontal: a business expands its domestic operations to a foreign country. In this case, the
business conducts the same activities but in a foreign country. For example, McDonald’s
opening restaurants in Japan would be considered horizontal FDI.
Vertical: a business expands into a foreign country by moving to a different level of supply chain
In other words, a firm conducts different activities abroad but these activities are still related to
the main business. Using the same example, McDonald’s could purchase a large-scale farm in
Canada to produce meat for their restaurants.
Conglomerate: a business acquires an unrelated business in a foreign country. This is
uncommon, as it requires overcoming two barriers to entry: entering a foreign country and
entering a new industry or market. An example of this would be if Virgin Group, which is based
in the United Kingdom, acquired a clothing line in France.
Platform: a business expands into a foreign country but the output from the foreign operations
is exported to a third country. This is also referred to as export-platform FDI. Platform FDI
commonly happens in low-cost locations inside free-trade areas. For example, if Ford purchased
manufacturing plants in Ireland with the primary purpose of exporting cars to other countries in
the EU.

Flow
 Outward when home country invested to host country.
 Inward when other country invested to home country.
for example, when a company based in PH invests in an enterprise based overseas the PH-based
company is the direct investor and the overseas firm is the direct investment enterprise the
transactions captured will be recorded in PH outward FDI conversely inward FDI is recorded
when a foreign direct investor invests in PH

how is FDI measured

Equity capital + retained earnings + net inter-company loans = FDI

is measured by the sum of three components equity capital invested by the direct investor in
the direct investment enterprise retained earnings accrued to the direct investor which are
earnings generated by the direct investment enterprise after deducting the dividends payable to
the direct investor and net inter-company loans between the direct investor and the direct
investment enterprise

FDI is typically positive but in some instances could be negative such as when the value of loans
from the direct investment enterprise to the direct investor is larger than the loans from the
direct investor to the direct investment enterprise

4 types of motives for FDI

Resource-seeking
Resource seeking firms are motivated to invest abroad to acquire specific resources at a lower
cost and could be obtained in their home country.
  physical resources such as rare earth crude oil and agricultural products
 cheap and diligent unskilled or semi-skilled labor
 technological capacity management or marketing expertise and organizational skills

Market-seeking
Market seekers are firms that invest in a particular country or region in order to serve markets
in that country or region. Apart from market size and expected market growth there are three
additional reasons why market-seeking firms may undertake foreign investment

 If a firm's main suppliers or customers have expanded overseas then the firm might
need to follow them in order to retain its business.
 If a firm may need to adapt its product to local tastes and specific market requirements
which can only be achieved through market presence in the form of fdi
 If a firm may consider it necessary to have a physical presence in the leading markets
served by its competitors as part of its global strategy

Efficiency-seeking
The motivation of efficiency seeking foreign direct investors is to rationalize their products
distribution and marketing activities through common governance of and synergy building
among geographically dispersed operations.

such rationalization essentially stems from two sources

 the advantages of differences in the cost of factor endowments between countries
 the economies of scale and scope.

Government policy-seeking
 Subsidies
 Low interest loans
 Tax concessions
Benefits of FDI
 Increased employment
 Human resource development
 Provisions of finance and technology
 Increased in Export
 Creation of competitive market
 Stimulation of economic development

Cons of FDI
 It can replace local businesses
 No guarantee benefits for the recipient country
 It can encourage political corruption
 It can contribute to pollution
 It can promote cultural erosion

Political Views

Radical View
Marxist Political and economic theories
Multinational cooperation is an instrument of imperialist domination as well as a
tool for exploiting host countries to the exclusive benefit of their capitalist or imperialist home
countries.

Free Market View

International production should be distributed among countries according to the theory
of comparative advantage.
Countries should specialize in the production of the goods and services
that they can produce most efficiently
Pragmatic Nationalism
FDI should only be allowed if the benefits outweigh the cost
Firms that possessed important technology were often permitted to enrage in
FDI if they agreed to either license their technology to a local firm or enter into a joint venture
with a Japanese enterprise.

What is portfolio investment

Portfolio investments are assets such as stocks, bonds and cash equivalents portfolio
investments are held directly by an investor or managed by financial professionals. in economics
foreign portfolio investment is the entry of funds into a country where foreigners deposit
money in a country's bank or make purchases in the country's stock and bond markets
sometimes for speculation portfolio investments typically involve transactions and securities
that are highly liquid that is they can be bought and sold very quickly

Foreign Portfolio Investment (FPI) vs Foreign Direct Investment (FDI)

FPI
 An investor does not manage the investments
 Do not have direct control over the assets or the business
 Offers a quicker return on the Investors money.
 Used mostly by average retail investors

FDI
 Investors purchase direct business interest in a foreign country
 Manages the company into which they put money
 Faces less liquidity and more risk
 Faces currency Exchange risk
 Use mostly by companies and high-net worth individuals
Pros and Cons of FPI
PROS.
 Gain access to a bigger market
 Benefits from exchange rates
 Diversify your portfolio
 Access international credit

CONS
 Political factors
 Unpredictable nature of assets