A Foreign direct investment(FDI) is a controlling ownership in a business enterprise in one country by an entity based in another country. Foreign direct investment is distinguished from portfolio foreign investment, a passive investment in the securities of another country such as public stocks and bonds, by the element of control According to the financial Times “Standard definitions of control use the internationally agreed 10 percent threshold of voting shares,but this is a grey area as often a smaller block of shares will control in widely held companies. Moreover, control of technology, management, even crucial inputs can confer de facto control.
The origin of the investment does not impact the definition as an FDI, i.e., the investment may be made either
“inorganically” by buying a company in the target country or “organically” by expanding operations of an existing business in that country.
Definition of Foreign Direct Investment-FDI
An investment made by a company or entity based in one country, into a company or entity based in another country. Foreign direct investments differ substantially from indirect investments such as portfolio flows, wherein overseas institutions invest in equities listed on a nation’s stock exchange. Entities making direct investments typically have a significant degree of influence and control over the company into which the investment is made. Open economies with skilled workforce’s and good growth prospects tend to attract larger amounts of foreign direct investment than closed, highly regulated economies.
Explains Foreign Direct Investment
The investing company may make its overseas investment in an number of ways-either by setting up a subsidiary or associate company in the foreign country, by acquiring shares of an overseas company, or through a merger or joint venture. The accepted threshold for a foreign direct investment relationship,as defined by the OECD, is 10%. That is, the foreign investor must own at least 10% or more of the voting stock or ordinary shares of the investee company.
An example of foreign direct investment would be an American company taking a majority setting up a joint venture to develop a mineral deposit in Chile.