Foreign Direct Investment

Abstract

According to the OECD, foreign direct investment "reflects the objective of obtaining a lasting interest by a resident entity in one economy (‘‘direct investor’’) in an entity resident in an economy other than that of the investor (‘‘direct investment enterprise’’). The lasting interest implies the existence of a long-term relationship between the direct investor and the enterprise and a significant degree of influence on the management of the enterprise. Direct investment involves both the initial transaction between the two entities and all subsequent capital transactions between them and among affiliated enterprises, both incorporated and unincorporated." As a practical matter, an equity share of more than 10% is usually considered the threshold for the control of an asset. In contrast to FDI, investment that does not aim at the exercise of control is usually referred to as Foreign Portfolio Investment (FPI). To be classified as FDI, it does not matter if the direct investment enterprise is incorporated in the foreign country, and is thus a subsidiary or associate company, or not incorporated and is thus a branch. A frequent distinction with regard to FDI is between flows and stocks. Obviously, FDI stocks denote the value of FDI in a given country at a given point of time, while FDI flows denote the amount of FDI flowing to a given country in given period of time. Another important differentiation regarding the nature of FDI is between Mergers and Acquisitions (M&As) and Greenfield investment. While the notion of M&A is self-explanatory, Greenfield investment refers to investment that includes the establishment of new production facilities such as offices, buildings and factories.