A foreign direct investment (FDI) is a purchase of an interest in a company by a company or an investor located outside its borders.
Generally, the term is used to describe a business decision to acquire a substantial stake in a foreign business or to buy it outright in order to expand its operations to a new region. It is not usually used to describe a stock investment in a foreign company.
Foreign direct investment (FDI) is when a company takes controlling ownership in a business entity in another country. With FDI, foreign companies are directly involved with day-to-day operations in the other country. This means they aren’t just bringing money with them, but also knowledge, skills and technology.
Generally, FDI takes place when an investor establishes foreign business operations or acquires foreign business assets, including establishing ownership or controlling interest in a foreign company.
FDI allows the transfer of technology—particularly in the form of new varieties of capital inputs—that cannot be achieved through financial investments or trade in goods and services. FDI can also promote competition in the domestic input market.
Types of Foreign Direct Investment
Foreign direct investments are commonly categorized as horizontal, vertical, or conglomerate.
- With a horizontal direct investment, a company establishes the same type of business operation in a foreign country as it operates in its home country. A U.S.-based cell phone provider buying a chain of phone stores in China is an example.
- In a vertical investment, a business acquires a complementary business in another country. For example, a U.S. manufacturer might acquire an interest in a foreign company that supplies it with the raw materials it needs.
- In a conglomerate type of foreign direct investment, a company invests in a foreign business that is unrelated to its core business. Since the investing company has no prior experience in the foreign company’s area of expertise, this often takes the form of a joint venture.