Chapter 4

Foreign Direct
Investment
What is Foreign Direct
Investment???
is an investment from a party in one country into a business or
corporation in another country with the intention of establishing a lasting
interest. Lasting interest differentiates FDI from foreign portfolio
investments, where investors passively hold securities from a foreign
country. A foreign direct investment can be made by obtaining a lasting
interest or by expanding one’s business into a foreign country.

is investment by non-resident entities like MNCs(Multinational

Corporations’) to carryout business operations in Philippines with
management of investment, production of goods or services, employing
people and marketing their products. In FDI, both the ownership and
control of the firm is with the investor. The foreign investor usually takes
a considerable stake or shareholding in the company and exerts
management influences completely or partially, depending on his
shareholding.
 What is a Foreign Portfolio Investment?
 FPI on the other hand is investment in shares, bonds, debentures, etc.
According to the IMF, portfolio investment is defined as cross-border
transactions and positions involving debt or equity securities, other than
those included in direct investment or reserve assets.

Difference between FDI and FPI:

FDI means real investment; whereas FPI is monetary or financial investment
–Here, FDI means the investor makes investment in buildings and machineries
directly in the company in which he has made the investment. FPI doesn’t create
such productive asset creation directly. It is just financial investment. FDI is
certain, predictable, takes production risks, have stabilizing impact on
production. It directly augments employment, output, export etc. The major
merit of FDI is that it is non debt creating as well as non-volatile (less
fluctuating).
Importance of Foreign Direct
Investment

Foreign direct investment is of important economic topics firewall

significantly in recent times, where the race of developing States, in particular,
to attract foreign direct investment. Foreign direct investment (FDI) is the
transfer of foreign capital investment abroad directly, since it is one of the main
engines of economic growth in the country.

Foreign direct investment contributes to many things, to expand the base of

investment in the country, as well as in solving the problem of unemployment
through the creation of new job opportunities, and the introduction of advanced
technology, the state, and learn about the modern methods of management,
communication and marketing, which lead to the National Employment gain
higher skill and experience.
Methods of Foreign Direct Investment

As mentioned above, an investor can make a foreign direct investment by

expanding their business in a foreign country. Amazon opening a new
headquarters in Vancouver, Canada would be an example of this.
Reinvesting profits from overseas operations as well as intercompany loans to
overseas subsidiaries are also considered foreign direct investments.
Finally, there are multiple methods for a domestic investor to acquire voting
power in a foreign company. Below are some examples:
 Acquiring voting stock in a foreign company
 Mergers and Acquisitions
 Joint Ventures with foreign corporations
 Starting a subsidiary of a domestic firm in a foreign country
Benefits of Foreign Direct Investment
For Businesses:
 Market diversification
- is a corporate strategy to enter into a new market or industry in which the business doesn't
currently operate, while also creating a new product for that new market.
 Tax incentives
- is a government measure that is intended to encourage individuals and businesses to spend
money or to save money by reducing the amount of tax that they have to pay.
 Preferential tariffs
- refers to tariff favoring the products of one country preferential to another. It is extended to
partner countries who have signed Free Trade Agreements (FTA) with each other. On entering an FTA, the
customs duties for selected imported goods that originate from the FTA partner countries are lower or
totally eliminated.
 Subsidies
- A subsidy is a benefit given to an individual, business, or institution, usually by the
government. It is usually in the form of a cash payment or a tax reduction. The subsidy is typically
given to remove some type of burden, and it is often considered to be in the overall interest of
the public, given to promote a social good or an economic policy.
For the Host Country:

 Economic stimulation

 Development of human capital

 Increase in employment

 Access to management expertise, skills, and technology.

 Disadvantage of Foreign Direct
Investment
 Displacement of local businesses

 Profit repatriation

Types and Forms of Foreign Direct Investment:

 Horizontal F.D.I.
– a business expands its domestics operations to a foreign country.
In this case, the business conducts the same activities but in a foreign country.
 Vertical F.D.I.
– a business expands into a foreign country by moving to a different
level of the supply chain. In other words, a firm conducts different activities
abroad but these activities are still related to the main business.
 Vertical
− In vertical assignments, different types of activities are carried out abroad. In
case of forward vertical FDI, the FDI brings the company nearer to a market (for
example, Toyota buying a car distributorship in America). In case of backward
Vertical FDI, the international integration goes back towards raw materials (for
example, Toyota getting majority stake in a tire manufacturer or a rubber
plantation).

 Conglomerate
− In this type of investment, the investment is made to acquire an unrelated
business abroad. It is the most surprising form of FDI, as it requires overcoming two
barriers simultaneously – one, entering a foreign country and two, working in a new
industry.
 Thank You for Listening

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