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Understanding Foreign Direct Investment

Foreign direct investment (FDI) involves an investment from one country into a business in another, aiming for a lasting interest, unlike foreign portfolio investments. Benefits of FDI include market diversification and tax incentives, while disadvantages include local business displacement and profit repatriation. FDI can be categorized as horizontal, where a business expands its domestic operations abroad, or vertical, where it moves to a different level of the supply chain in a foreign country.

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13 views1 page

Understanding Foreign Direct Investment

Foreign direct investment (FDI) involves an investment from one country into a business in another, aiming for a lasting interest, unlike foreign portfolio investments. Benefits of FDI include market diversification and tax incentives, while disadvantages include local business displacement and profit repatriation. FDI can be categorized as horizontal, where a business expands its domestic operations abroad, or vertical, where it moves to a different level of the supply chain in a foreign country.

Uploaded by

sameer prasad
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© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd

FDI (Foreign Direct Investment)

Foreign direct investment (FDI) is an investment from a party in one country into a business or
corporation in another country with the intention of establishing a lasting interest. Lasting
interest differentiates FDI from foreign portfolio investments, where investors passively hold
securities from a foreign country. A foreign direct investment can be made by obtaining a
lasting interest or by expanding one’s business into a foreign country.
An investor can make a foreign direct investment by expanding their business in a foreign
country.

 Acquiring voting stock in a foreign company


 Mergers and acquisitions
 Joint ventures with foreign corporations
 Starting a subsidiary of a domestic firm in a foreign country

Below are some of the benefits for businesses:

 Market diversification
 Tax incentives
 Lower labor costs
 Preferential tariffs
 Subsidies

Two main disadvantages to FDI

 Displacement of local businesses


 Profit repatriation

Horizontal and vertical FDI.

 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 the
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.

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