Foreign direct investment (FDI) is a direct investment into production or business in a country by a company in another country, either by buying

a company in the target country or by expanding operations of an existing business in that country. Foreign direct investment is in contrast to portfolio investment which is a passive investment in the securities of another country such as stocks and bonds.

Definition of 'Foreign Direct Investment - FDI'

An investment made by a company or entity based in one country, into a company or entity based in another country. Foreign direct investments differ substantially from indirect investments such as portfolio flows, wherein overseas institutions invest in equities listed on a nation's stock exchange. Entities making direct investments typically have a significant degree of influence and control over the company into which the investment is made. Open economies with skilled workforces and good growth prospects tend to attract larger amounts of foreign direct investment than closed, highly regulated economies.

Investopedia explains 'Foreign Direct Investment - FDI'

The investing company may make its overseas investment in a number of ways - either by setting up a subsidiary or associate company in the foreign country, by acquiring shares of an overseas company, or through a merger or joint venture. The accepted threshold for a foreign direct investment relationship, as defined by the OECD, is 10%. That is, the foreign investor must own at least 10% or more of the voting stock or ordinary shares of the investee company. An example of foreign direct investment would be an American company taking a majority stake in a company in China. Another example would be a Canadian company setting up a joint venture to develop a mineral deposit in Chile.

Advantages of Foreign Direct Investment - a firm will favor FDI over exporting when transportation costs are high trade barriers are high A firm will favor FDI over licensing when it wants control over its technological know-how it wants over its operations and business strategy the firms capabilities are not amenable to licensing

Host Country Benefits

1. Resource Transfer Effects FDI can bring capital, technology, and management resources that would otherwise not be available 2. Employment Effects FDI can bring jobs that would otherwise not be created there 3. Balance-of-Payments Effects

 A countrys balance-of-payments account is a record of a countrys payments to and receipts from other countries The current account is a record of a countrys export and import of goods and services a current account surplus is usually favored over a deficit FDI can help achieve a current account surplus if the FDI is a substitute for imports of goods and services if the MNE uses a foreign subsidiary to export goods and services to other countries 4. Effect on Competition and Economic Growth FDI in the form of greenfield investment increases the level of competition in a market drives down prices improves the welfare of consumers Increased competition can lead to increased productivity growth product and process innovation greater economic growth

Host Country Costs

There are three main costs of inward FDI the possible adverse effects of FDI on competition within the host nation adverse effects on the balance of payments the perceived loss of national sovereignty and autonomy

 Home Country Benefits

The benefits of FDI to the home country include the effect on the capital account of the home countrys balance of payments from the inward flow of foreign earnings the employment effects that arise from outward FDI the gains from learning valuable skills from foreign markets that can subsequently be transferred back to the home country