Basics of Foreign Direct Investment (FDI)

Basics of Foreign Direct Investment (FDI)

Foreign direct investment (FDI) occurs when a firm invests directly in facilities to produce or market a product in a foreign country. FDI occurs whenever an organization or affiliated group takes an interest of 10 percent or more in a foreign business entity. Once a firm undertakes FDI, it becomes a multinational enterprise. Walmart is the first multinational in the early 1990’s when it is invested in Mexico.

FDI takes on two main forms. The first is a greenfield investment, which involves the establishment of a new operation in a foreign country. The second involves acquiring or merging with an existing firm in the foreign country. Acquisitions can be a minority (where the foreign firm takes a 10 to 49 percent interest in the firm’s voting stock), majority (foreign interest of 50 to 99 percent), or full outright stake (foreign interest of 100 percent).

It is important to distinguish between the flow of FDI and the stock of FDI. The flow of FDI refers to the amount of FDI undertaken over a given time period. The stock of FDI refers to the total accumulated value of foreign owned assets at a given time. We also talk of outflows of FDI, meaning the flow of FDI out of a country, and inflows of FDI, the flow of FDI into a country.