What Is Foreign Direct Investment (FDI)? Definition, Types and Impact
Quick Answer
Foreign Direct Investment (FDI) occurs when a firm invests in productive assets in another country. FDI is a key driver of globalization, enabling multinationals to establish operations abroad and transfer technology and capital.
Defining Foreign Direct Investment
Foreign Direct Investment (FDI) refers to an investment made by a firm or individual in one country into a business or asset in another country, with the intention of establishing lasting influence and control. It is distinguished from portfolio investment (buying shares without control) by the element of managerial influence or control — typically defined as ownership of 10% or more of voting shares in a foreign enterprise.
FDI is one of the most important drivers of globalization, enabling multinational corporations to expand their operations, access new markets, reduce production costs, and integrate into global supply chains.
Types of FDI
Greenfield Investment
A firm builds entirely new productive facilities in a foreign country — factories, offices, or distribution centers. Greenfield FDI creates new productive capacity and employment in the host country. It is preferred when the investor wants full control and no existing business matches their needs.
Mergers and Acquisitions (M&A)
A firm acquires or merges with an existing business in the foreign country. This provides faster market entry and immediate access to local knowledge, customer relationships, and management. M&A accounts for the majority of global FDI by value.
Joint Ventures
Two firms — domestic and foreign — co-invest in a new entity. This shares risk and leverages local partner knowledge, but requires profit and decision-sharing.
Horizontal vs. Vertical FDI
| Type | Description | Example |
|---|---|---|
| Horizontal FDI | Replicating the same business in a foreign market | Toyota building a car factory in the UK |
| Vertical FDI (Backward) | Investing in a foreign supplier of inputs | Oil company acquiring foreign oil fields |
| Vertical FDI (Forward) | Investing in foreign distribution/retail | Manufacturer buying foreign distribution network |
Why Firms Invest Abroad: The OLI Framework
The OLI framework (John Dunning) explains FDI through three advantages:
- Ownership advantages: Proprietary technology, brand, management expertise
- Location advantages: Lower costs, market access, natural resources in the host country
- Internalization advantages: Benefits of keeping activities within the firm rather than licensing
Impact of FDI on Host Countries
Positive effects: Job creation, technology transfer, tax revenues, skills development, improved infrastructure.
Negative effects: Profit repatriation reduces local economic benefit, competition may crowd out domestic firms, environmental standards may be weaker.
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