Foreign direct investment (FDI) or foreign investment refers to the net inflows of investment to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor.[1] It is the sum of equity capital,other long-term capital, and short-term capital as shown in the balance of payments. It usually involves participation in management, joint-venture, transfer of technology and expertise. There are two types of FDI: inward foreign direct investment and outward foreign direct investment, resulting in a net FDI inflow (positive or negative) and "stock of foreign direct investment", which is the cumulative number for a given period. Direct investment excludes investment through purchase of shares.[2] FDI is one example of international factor movement.
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FDI is a measure of the ownership of productive assets, such as factories, mines and land. Increasing foreign investment can be used as the measure of growing economic globalization. The figure below shows net inflows of foreign direct investment in the United States. 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:[3]
| Period | FDI Inflow | FDI Outflow | Net Inflow |
|---|---|---|---|
| 1960–69 | $ 42.18 bn | $ 5.13 bn | + $ 37.04 bn |
| 1970–79 | $ 122.72 bn | $ 40.79 bn | + $ 81.93 bn |
| 1980–89 | $ 206.27 bn | $ 329.23 bn | – $ 122.96 bn |
| 1990–99 | $ 950.47 bn | $ 907.34 bn | + $ 43.13 bn |
| 2000–07 | $ 1,629.05 bn | $ 1,421.31 bn | + $ 207.74 bn |
| Total | $ 2,950.72 bn | $ 2,703.81 bn | + $ 246.88 bn |
A foreign direct investor may be classified in any sector of the economy and could be any one of the following:
The foreign direct investor may acquire voting power of an enterprise in an economy through any of the following methods:
Foreign direct investment incentives may take the following forms:
The United Nations Conference on Trade and Development said that there was no significant growth of Global FDI in 2010. In 2010 was $1,122 billion and in 2009 was $1,114 billion. The figure was 25 percent below the pre-crisis average between 2005 to 2007.[4]
The United States is the world’s largest recipient of FDI. More than $228 billion in FDI flowed into the United States in 2010, with Europe contributing 75% of the total.[5] The $2.1 trillion stock of FDI in the United States at the end of 2008 is the equivalent of approximately 16 percent of U.S. gross domestic product (GDP).
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. 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.
Affiliates of foreign corporations spent more than $34 billion 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]
FDI in China has increased considerably in the last decade reaching $185 billion in 2010.[7] China is the second largest recipient of FDI globally. FDI into China fell by over one-third in 2009 due the Global Financial Crisis (global macroeconomic factors) but rebounded in 2010.[8]
Starting from a baseline of less than $1 billion in 1990, a recent 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 which attracted higher inflows were services, telecommunication, construction activities and computer software and hardware. Mauritius, Singapore, the US and the UK were among the leading sources of FDI.
FDI in 2010 was $24.2 billion, a significant decrease from both 2008 and 2009.[9] Foreign direct investment in August 2010 dipped by about 60% to aprox. $34 billion, the lowest in 2010 fiscal, industry department data released showed.[10] In the first two months of 2010–11 fiscal, FDI inflow into India was at an all-time high of $7.78 billion up 77% from $4.4 billion during the corresponding period in the previous year.
The world’s largest retailer WalMart has termed India’s decision to allow 51% FDI in multi-brand retail as a “first important step” and said it will study the finer details of the new policy to determine the impact on its ability to do business in India.However this decision of the government is currently under suspension due to opposition from multiple political quarters.
FDI provides an inflow of foreign capital and funds, in addition to an increase in the transfer of skills, technology, and job opportunities. Many of the Four Asian Tigers benefited from investment abroad. A recent meta-analysis of the effects of foreign direct investment on local firms in developing and transition countries suggest that foreign investment robustly increases local productivity growth.[11] The Commitment to Development Index ranks the "development-friendliness" of rich country investment policies.