Foreign direct investment

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World Foreign Direct Investment
Foreign Direct Investment by Country
The Dutch East India Company (VOC) was an early corporate pioneer of outward foreign direct investment at the dawn of modern capitalism.[1][2]
Overview of Fort Zeelandia in Dutch Formosa (in the 17th-century). It was in the Dutch rule period of Taiwan that the VOC began to encourage large-scale mainland Chinese immigration.[3] The VOC's economic activities changed significantly the demographic and economic history of the island.[4][5]
Groot Constantia, the oldest wine estate in South Africa. The South African wine industry (New World wine) is among the lasting legacy of the VOC era.[6][7] Like native economy of Taiwan in pre-VOC era,[8] pre-1652 South Africa was virtually undeveloped or was in almost primitive state. In other words, the recorded economic history of South Africa and Taiwan both began with the VOC period.

A foreign direct investment (FDI) is an investment in the form of a controlling ownership in a business in one country by an entity based in another country.[9] It is thus distinguished from a foreign portfolio investment by a notion of direct control.

The origin of the investment does not impact the definition, as an FDI: the investment may be made either "inorganically" by buying a company in the target country or "organically" by expanding the operations of an existing business in that country.


Broadly, foreign direct investment includes "mergers and acquisitions, building new facilities, reinvesting profits earned from overseas operations, and intra company loans". In a narrow sense, foreign direct investment refers just to building new facility, and a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor.[10] FDI is the sum of equity capital, long-term capital, and short-term capital as shown in the balance of payments. FDI usually involves participation in management, joint-venture, transfer of technology and expertise. Stock of FDI is the net (i.e., outward FDI minus inward FDI) cumulative FDI for any given period. Direct investment excludes investment through purchase of shares (if that purchase results in an investor controlling less than 10% of the shares of the company).[11]

FDI, a subset of international factor movements, is characterized by controlling ownership of a business enterprise in one country by an entity based in another country. Foreign direct investment is distinguished from foreign portfolio investment, a passive investment in the securities of another country such as public stocks and bonds, by the element of "control".[9] 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 give control in widely held companies. Moreover, control of technology, management, even crucial inputs can confer de facto control."[9]

Theoretical background[edit]

According to Grazia Ietto-Gillies (2012),[12] prior to Stephen Hymer's theory regarding direct investment in the 1960s, the reasons behind foreign direct investment and multinational corporations were explained by neoclassical economics based on macro economic principles. These theories were based on the classical theory of trade in which the motive behind trade was a result of the difference in the costs of production of goods between two countries, focusing on the low cost of production as a motive for a firm's foreign activity. For example, Joe S. Bain only explained the internationalization challenge through three main principles: absolute cost advantages, product differentiation advantages and economies of scale. Furthermore, the neoclassical theories were created under the assumption of the existence of perfect competition. Intrigued by the motivations behind large foreign investments made by corporations from the United States of America, Hymer developed a framework that went beyond the existing theories, explaining why this phenomenon occurred, since he considered that the previously mentioned theories could not explain foreign investment and its motivations.

Facing the challenges of his predecessors, Hymer focused his theory on filling the gaps regarding international investment. The theory proposed by the author approaches international investment from a different and more firm-specific point of view. As opposed to traditional macroeconomics-based theories of investment, Hymer states that there is a difference between mere capital investment, otherwise known as portfolio investment, and direct investment. The difference between the two, which will become the cornerstone of his whole theoretical framework, is the issue of control, meaning that with direct investment firms are able to obtain a greater level of control than with portfolio investment. Furthermore, Hymer proceeds to criticize the neoclassical theories, stating that the theory of capital movements cannot explain international production. Moreover, he clarifies that FDI is not necessarily a movement of funds from a home country to a host country, and that it is concentrated on particular industries within many countries. In contrast, if interest rates were the main motive for international investment, FDI would include many industries within fewer countries.

Another observation made by Hymer went against what was maintained by the neoclassical theories: foreign direct investment is not limited to investment of excess profits abroad. In fact, foreign direct investment can be financed through loans obtained in the host country, payments in exchange for equity (patents, technology, machinery etc.), and other methods. The main determinants of FDI is side as well as growth prospectus of the economy of the country when FDI is made. Hymer proposed some more determinants of FDI due to criticisms, along with assuming market and imperfections. These are as follows:

  1. Firm-specific advantages: Once domestic investment was exhausted, a firm could exploit its advantages linked to market imperfections, which could provide the firm with market power and competitive advantage. Further studies attempted to explain how firms could monetize these advantages in the form of licenses.
  2. Removal of conflicts: conflict arises if a firm is already operating in foreign market or looking to expand its operations within the same market. He proposes that the solution for this hurdle arose in the form of collusion, sharing the market with rivals or attempting to acquire a direct control of production. However, it must be taken into account that a reduction in conflict through acquisition of control of operations will increase the market imperfections.
  3. Propensity to formulate an internationalization strategy to mitigate risk: According to his position, firms are characterized with 3 levels of decision making: the day to day supervision, management decision coordination and long-term strategy planning and decision making. The extent to which a company can mitigate risk depends on how well a firm can formulate an internationalization strategy taking these levels of decision into account.

Hymer's importance in the field of international business and foreign direct investment stems from him being the first to theorize about the existence of multinational enterprises (MNE) and the reasons behind FDI beyond macroeconomic principles, his influence on later scholars and theories in international business, such as the OLI (ownership, location and internationalization) theory by John Dunning and Christos Pitelis which focuses more on transaction costs. Moreover, "the efficiency-value creation component of FDI and MNE activity was further strengthened by two other major scholarly developments in the 1990s: the resource-based (RBV) and evolutionary theories"[13] In addition, some of his predictions later materialized, for example the power of supranational bodies such as IMF or the World Bank that increases inequalities (Dunning & Piletis, 2008). A phenomenon the United Nations Sustainable Development Goal 10 aims to address.[14]

Types of FDI[edit]

  1. Horizontal FDI arises when a firm duplicates its home country-based activities at the same value chain stage in a host country through FDI.
  2. Platform FDI Foreign direct investment from a source country into a destination country for the purpose of exporting to a third country.
  3. Vertical FDI takes place when a firm through FDI moves upstream or downstream in different value chains i.e., when firms perform value-adding activities stage by stage in a vertical fashion in a host country.


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

  • by incorporating a wholly owned subsidiary or company anywhere
  • 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

Forms of FDI incentives[edit]

Foreign direct investment incentives may take the following forms:[15]


FDI flows are more likely to go countries with democratic institutions.[18]

A 2010 meta-analysis of the effects of foreign direct investment (FDI) on local firms in developing and transition countries suggests that foreign investment robustly increases local productivity growth.[19]


According to a study conducted by EY, France was in 2020 the largest foreign direct investment recipient in Europe, ahead of the UK and Germany.[20] EY attributed this as a "direct result of President Macron's reforms of labor laws and corporate taxation, which were well received by domestic and international investors alike."[20]


FDI in China, also known as RFDI (renminbi foreign direct investment), has increased considerably in the last decade, reaching $19.1 billion in the first six months of 2012, making China the largest recipient of foreign direct investment at that point of time and topping the United States which had $17.4 billion of FDI.[21] In 2013 the FDI flow into China was $24.1 billion, resulting in a 34.7% market share of FDI into the Asia-Pacific region. By contrast, FDI out of China in 2013 was $8.97 billion, 10.7% of the Asia-Pacific share.[22] During the global financial crisis FDI fell by over one-third in 2009 but rebounded in 2010.[23] China implemented the Foreign Investment Law[24] in 2020.


Foreign investment was introduced in 1991 under Foreign Exchange Management Act (FEMA), driven by then finance minister Manmohan Singh.[25][26] India disallowed overseas corporate bodies (OCB) to invest in India.[27] India imposes cap on equity holding by foreign investors in various sectors, current FDI in aviation and insurance sectors is limited to a maximum of 49%.[28][29] A 2012 UNCTAD survey projected India as the second most important FDI destination (after China) for transnational corporations during 2010–2012. As per the data, the sectors that attracted higher inflows were services, telecommunication, construction activities and computer software and hardware. Mauritius, Singapore, US and UK were among the leading sources of FDI. Based on UNCTAD data FDI flows were $10.4 billion, a drop of 43% from the first half of the last year.[30] In 2015, India emerged as top FDI destination surpassing China and the US. India attracted FDI of $31 billion compared to $28 billion and $27 billion of China and the US respectively.[31][32]

United States[edit]

Broadly speaking, the United States has a fundamentally "open economy" and low barriers to the FDI.[33]

U.S. FDI totaled $194[34] billion in 2010. 84% of FDI in the United States in 2010 came from or through eight countries: Switzerland, the United Kingdom, Japan, France, Germany, Luxembourg, the Netherlands, and Canada.[35] A major source of investment is real estate; the foreign investment in this area totaled $92.2 billion in 2013,[citation needed] under various forms of purchase structures (considering the U.S. taxation and residency laws).[citation needed]

A 2008 study by the Federal Reserve Bank of San Francisco indicated that foreigners hold greater shares of their investment portfolios in the United States if their own countries have less developed financial markets, an effect whose magnitude decreases with income per capita. Countries with fewer capital controls and greater trade with the United States also invest more in U.S. equity and bond markets.[36]

White House data reported in 2011 found that a total of 5.7 million workers were employed at facilities highly dependent on foreign direct investors. Thus, about 13% of the American manufacturing workforce depended on such investments. The average pay of said jobs was found as around $70,000 per worker, over 30% higher than the average pay across the entire U.S. workforce.[33]

President Barack Obama said in 2012, "In a global economy, the United States faces increasing competition for the jobs and industries of the future. Taking steps to ensure that we remain the destination of choice for investors around the world will help us win that competition and bring prosperity to our people."[33]

In September 2013, the United States House of Representatives voted to pass the Global Investment in American Jobs Act of 2013 (H.R. 2052; 113th Congress), a bill which would direct the United States Department of Commerce to "conduct a review of the global competitiveness of the United States in attracting foreign direct investment".[37] Supporters of the bill argued that increased foreign direct investment would help job creation in the United States.[38]


In November 2021, a report from the Eurasian Development Bank revealed that Kazakhstan boasted the highest FDI stock value from the Eurasian Economic Union (EAEU) with $11.2 billion by 2020 and an increase of over $3 billion since 2017. [39]

See also[edit]


  1. ^ Brenner, Reuven (1994). Labyrinths of Prosperity: Economic Follies, Democratic Remedies. (University of Michigan Press, 1994), p. 57-60
  2. ^ Moore, Jason W. (2010b). "'Amsterdam is Standing on Norway' Part II: The Global North Atlantic in the Ecological Revolution of the Long Seventeenth Century," Journal of Agrarian Change, 10, 2, p. 188–227
  3. ^ Chen, Piera; Gardner, Dinah: Lonely Planet: Taiwan [10th edition]. (Lonely Planet, 2017, ISBN 978-1786574398).
  4. ^ Shih, Chih-Ming; Yen, Szu-Yin (2009). The Transformation of the Sugar Industry and Land Use Policy in Taiwan, in Journal of Asian Architecture and Building Engineering [8:1], pp. 41–48
  5. ^ Tseng, Hua-pi (2016). Sugar Cane and the Environment under Dutch Rule in Seventeenth Century Taiwan, in Environmental History in the Making, pp. 189–200
  6. ^ Estreicher, Stefan K. (2014), 'A Brief History of Wine in South Africa,'. European Review 22(3): pp. 504–537. doi:10.1017/S1062798714000301
  7. ^ Fourie, Johan; von Fintel, Dieter (2014), 'Settler Skills and Colonial Development: The Huguenot Wine-Makers in Eighteenth-Century Dutch South Africa,'. The Economic History Review 67(4): 932–963. doi:10.1111/1468-0289.12033
  8. ^ Thompson, Laurence G. (1964), 'The Earliest Chinese Eyewitness Accounts of the Formosan Aborigines,'. Monumenta Serica 23(1): 163–204. Laurence G. Thompson (1964) noted, "The most striking fact about the historical knowledge of Formosa is the lack of it in Chinese records. It is truly astonishing that this very large island, so close to the mainland that on exceptionally clear days it may be made out from certain places on the Fukien coast with the unaided eye, should have remained virtually beyond the ken of Chinese writers down until late Ming times (seventeenth century)."
  9. ^ a b c "Foreign Direct Investment Definition from Financial Times Lexicon".
  10. ^ "Foreign direct investment, net inflows (BoP, current US$) | Data | Table". Retrieved 17 November 2012.
  11. ^ "CIA – The World Factbook". Retrieved 17 November 2012.
  12. ^ Ietto-Gillies, Grazia (2012). Transnational corporations and international production: Concepts, theories and effects. Cheltenham, UK; Northampton, MA: Edward Elgar. ISBN 978-0-85793-225-9.
  13. ^ Dunning, John H.; Pitelis, Christos N. (2008). "Stephen Hymer's contribution to international business scholarship: An assessment and extension". Journal of International Business Studies. 39 (1): 167–176. doi:10.1057/palgrave.jibs.8400328. ISSN 0047-2506. S2CID 153551822. Retrieved 12 July 2019.
  14. ^ "Goal 10 targets". UNDP. Retrieved 23 September 2020.
  15. ^ U.S. States regularly offer tax incentives to inbound investors. See, for example, an excellent summary, written by Sidney Silhan, of state tax incentives offered to FDI businesses at: BNA Portfolio 6580, U.S. Inbound Business Tax Planning, at A-71.
  16. ^
  17. ^ Sarkodie, Samuel Asumadu; Adams, Samuel; Leirvik, Thomas (1 August 2020). "Foreign direct investment and renewable energy in climate change mitigation: Does governance matter?". Journal of Cleaner Production. 263: 121262. doi:10.1016/j.jclepro.2020.121262. ISSN 0959-6526.
  18. ^ Jensen, Nathan M. (2008). Nation-States and the Multinational Corporation: A Political Economy of Foreign Direct Investment. Princeton University Press. ISBN 978-1-4008-3737-3.
  19. ^ Tomas Havranek & Zuzana Irsova (30 April 2011). "Which Foreigners are Worth Wooing? A Meta-Analysis of Vertical Spillovers from FDI". Retrieved 17 September 2012.
  20. ^ a b How can Europe reset the investment agenda now to rebuild its future?, EY, 28 May 2020
  21. ^ "China tops U.S. as investment target in 1st half 2012: U.N. agency". Reuters. 24 October 2012. Retrieved 24 October 2012.
  22. ^ "The fDi Report 2014 – Asia Pacific". fDi Magazine. 25 June 2014. Retrieved 17 July 2014.
  23. ^ "FDI by Country". Greyhill Advisors. Retrieved 15 November 2011.
  24. ^ "Foreign Investment Law of the People's Republic of China". Retrieved 19 November 2019.
  25. ^ "Why do you become 'Singham' for US, not for India? Narendra Modi asks Manmohan Singh". The Times Of India. 28 September 2012. Retrieved 13 December 2012.
  26. ^ "BJP will break recordsssss". The Times Of India. 13 December 2012. Retrieved 13 December 2012.
  27. ^ "Derecognition of overseas corporate bodies (OCBs)" (PDF). 8 December 2003. Retrieved 16 September 2012.
  28. ^ Airlines: Govt OK's 49% FDI stake buy. Indian Express (14 September 2012). Retrieved on 28 July 2013.
  29. ^ "FDI Limit in Insurance sector increased from 26% to 49%". Retrieved 10 July 2014.
  30. ^ "China Edges Out U.S. as Top Foreign-Investment Draw Amid World Decline". Wall Street Journal. 23 October 2012.
  31. ^ "India pips US, China as No. 1 foreign direct investment destination". The Times of India. Times News Network. Retrieved 1 October 2015.
  32. ^ "India Pips China, US to Emerge as Favourite Foreign Investment Destination". Retrieved 1 October 2015.
  33. ^ a b c "White House Touts Growing Foreign Direct Investment In The U.S. accepted ngp". ABC News. 20 June 2011. Retrieved 2 November 2012.
  34. ^ [1][permanent dead link]
  35. ^ "U.S. FDI and site selection". Greyhill Advisors. Archived from the original on 15 October 2011. Retrieved 19 October 2011.
  36. ^ "Why Do Foreigners Invest in the United States?" (PDF). Federal Reserve Bank of San Francisco. October 2008. Retrieved 17 November 2012.
  37. ^ "H.R. 2052 – Text". United States Congress. p. Section 4(a). Retrieved 11 September 2013.
  38. ^ Kasperowcz, Pete (9 September 2013). "House passes bill aimed at boosting foreign direct investments in the U.S." The Hill. Retrieved 11 September 2013.
  39. ^ November 2021, Assel Satubaldina in Business on 22 (22 November 2021). "Kazakhstan Leading in FDI Stock Value from Eurasian Economic Union Countries". The Astana Times. Retrieved 23 November 2021.

External links[edit]