Foreign Investment Guide - What You Should Know About Foreign Investment

It’s not news that Foreign Direct Investment is the way in which most businesses expand into many countries thereby becoming a stronghold. However, it’s important to know everything about investing in another country so you won’t invest wrongly. To save the stress we at Investingport have given a breakdown of all you need about Foreign Direct Investment (FDI).

What Is a Foreign Direct Investment (FDI)?

The term "foreign direct investment," or "FDI," refers to an ownership position in a foreign firm or project that is made by an investor, corporation, or government from a different nation.

In most cases, the phrase FDI is used to refer to a choice made by a company to either buy a major portion of a foreign company or to buy the company altogether in order to extend its operations into a new territory. 

How Does Foreign Direct Investment (FDI) Work?

Businesses or governments that are contemplating making a foreign direct investment (FDI) would often look for target enterprises or projects in open economies that provide a trained workforce and above-average growth potential for the investor. Also, people tend to value government regulations that are not highly strict. Foreign direct investment (FDI) covers more than just capital investment. 

Types of Foreign Direct Investment

Foreign Direct Investment (FDI) is classified into three categories and they are horizontal investments, vertical investments, and conglomerate investments. Below you’ll be seeing more breakdowns on the three categories of the FDI.

Horizontal Investments

In the case of horizontal foreign direct investment (FDI), a corporation will set up the exact same kind of business company in a different nation as it does in the nation in which it is headquartered. One illustration of this would be a mobile phone service provider based in the United States purchasing a retail chain of phone shops located in China.

Vertical Investments

An example of vertical foreign direct investment is when a company buys out another company in another nation that is similar to its own. For instance, a manufacturer in the United States may purchase a stake in a foreign firm that provides it with the essential raw materials so that it can secure future access to those materials.

Conglomerate Investments

When a firm engages in foreign direct investment (FDI), often known as conglomerate FDI, the company invests in a foreign business that is unrelated to the company's primary business. It is common practice for this to take the form of a joint venture because the firm that is investing does not have any previous experience in the field in which the foreign company specializes.

Pros and Cons of Foreign Direct Investment (FDI)

When investing in a country, it’s good you know that this comes with some advantages and disadvantages, and knowing this before time is very important. Below are some reasons why you should or shouldn’t consider going into foreign direct investment (FDI).

Pros of Foreign Direct Investment (FDI)

• Expansion of the market

• Opportunities for taxation

• Reduced overall expenses of labor

• Tariff breaks and waivers

• Subsidies

Cons of Foreign Direct Investment (FDI)

• Displacement of locally owned and operated businesses

• Return of earnings to shareholders