What are foreign direct investments? This type of investment’s ownership is controlled in one country by a company or individual based in a different country. The direct control distinguishes it clearly with foreign portfolio investment where investors hold security passively in a foreign country.
One of the defining characteristics of foreign direct investments is the abiding interest established by an international company. This is established when the owner of the FDI gets voting power of not less than 10% in the business voting power. Control is the key element in FDI and refers to active management and influential over the operations of the company.
Foreign Direct Investment Methods
A business owner can expand through foreign direct investment. This helps you establish yourself in a new market. FDI can be made in the form of reinvesting profits made overseas or via loans to the overseas subsidiaries.
Types of Foreign Direct Investments
Foreign direct investments are available in two types. They include:
This is where a company expands to another country. The business opens what looks like branches its local operations move to a foreign country. A good example is McDonald opening branches in a country like Japan
In this type of FDI, the business not only moves into a foreign country but also moves to a new supply chain level. The business changes its activities though in the same line of business. For example, McDonald can open a farm in Canada to supply its restaurants with meat.
The other two types of FDI that also take place are platform and conglomerate foreign direct investments.
In this type of FDI, a company gets into a business that is unrelated to its original one. It helps you overcome barriers that can hinder you from entering into the foreign country and venturing into a new market. An excellent example if the Virgin group; it is a US-based company, but it managed to penetrate France through a clothing line.
When a business establishes itself in another country but exports foreign operations from a different country, it is referred to as a platform. This type of FDI is also called export-platform. It is common in areas where they offer trade areas for free. An example will be if Ford chooses to buy a manufacturing plant in Ireland to export cars in the EU.
Advantages of Foreign Direct Investment
The advantages of foreign direct investments benefit both the host country and the investor. The incentives encourage these two parties to allow FDI. Here is how a business benefits from FDI:
- There is a market diversification, which is likely to lead to increased sales.
- Tax incentives
- Affordable labor rate
- Various subsidies
- Preferential tariffs.
The host country benefits in the following ways:
- The economy is stimulated and enhanced greatly
- Human capital gains more skills such as technology knowledge
- Job opportunities for citizens
- Access to different management skills, technology, and expertise.
Regardless of the type of foreign direct investment you choose, you will always have some benefits to enjoy.
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