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Profitable Investment Definition – Foreign direct investment (FDI) is an investment in the form of ownership control in business, real estate or productive assets such as factories in one country by companies based in another country.
Thus, it differs from foreign portfolio investments or foreign indirect investments by the concept of direct control.
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The origin of the investment does not affect the definition, as FDI: investment can be created either “inorganically” by buying companies in the target country or “organically” by expanding the operations of existing businesses in the country.
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In general, foreign direct investment includes “mergers and acquisitions, construction of new facilities, reinvestment of profits received from overseas operations, and intercompany loans.” In the narrow part, foreign direct investment shows only the construction of new facilities and permanent managerial interest (10 percent or more of the voting shares) in the enterprise operating in the economy, other than the investor.
FDI is the sum of equity capital, long-term capital and short-term capital as shown in the balance of payments. FDI usually involves participation in management, joint operations, technology transfer and expertise. Stock FDI is the cumulative FDI (ie, FDI outflows minus FDI inflows) for any given period. Direct investment does not include investing through the purchase of shares (if the purchase results in the investor controlling less than 10% of the company’s shares).
FDI, a subset of international factor movement, is characterized by controlling ownership of a business in one country by a company headquartered in another country. Foreign direct investment is distinguished from foreign portfolio investment, passive investment in securities of other countries such as common stocks and bonds, by the element of “control”.
According to the Financial Times, “the standard definition of control uses an international threshold of 10 percent of voting shares, but this is a gray area because often a small block of shares gives control in many holding companies. In addition, technological control, management, important inputs can provide de facto control.”
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Before Steph Heimer’s work on FDI in the 1960s, there was no theory that specifically discussed FDI. However, there is a theory that deals with foreign investment. Elie Heckscher (1919) and Bertil Ohlin (1933) developed the theory of foreign investment using neoclassical economics and macroeconomic theory. Based on this principle, differences in the costs of producing goods between two countries lead to specialization of employment and trade between countries. The reason for differences in production costs can be explained by the theory of factor proportions. For example, a country with a higher share of labor will measure in a labor-intensive industry, while a country with a higher share of capital will measure in a capital-intensive industry. However, the theory makes the assumption that there is perfect competition, no movement of labor across national borders,
And multinational firms assume risk-neutral preferences. In 1967, Weintraub tested this hypothesis by collecting data from the United States on rates of return and capital flows. However, the data failed to support this hypothesis. Research data on FDI motivation also do not support this hypothesis.
Interested in the motivation of large foreign investments made by US companies, Hymer developed a framework that went beyond existing theory, explaining why this phenomenon occurred, as he felt that previous theory could not explain foreign investment and motivation.
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Faced with challenges from his predecessors, Heimer focused his theory on filling gaps in international investment. The theory proposed by the author approaches international investments from a different and more specific point of view. Contrary to traditional investment theory based on macroeconomics, Heimer states that there is a difference between equity-only investments, otherwise known as portfolio investments, and direct investments. The difference between the two, which will be the basis of the entire theoretical framework, is the issue of control, which means that with direct investments companies can achieve a greater degree of control than with portfolio investments. Furthermore, Heimer continued to criticize the neoclassical theory, stating that the theory of capital movements could not explain international production. In addition, he explained that FDI is not always a transfer of funds from the country of origin to the host country, and deals are made in certain industries in many countries. Conversely, if interest rates are the main motive for international investment, FDI will cover many industries in several countries.
Another observation made by Hymer wt against what the neoclassical theory maintains: foreign direct investment is not limited to investing surplus profits abroad. In fact, foreign direct investment can be financed through loans obtained in the host country, paid in exchange for capital (roads, technology, machinery, etc.) and other methods.
The main determinant of FDI is the country and the economic growth perspective of the country in which the FDI is made. Heimer suggested some other determinants of FDI due to criticism, along with market and imperfection. These are as follows:
Heimer’s importance in the field of international business and foreign direct investment comes from his being the first to theorize the existence of multinational enterprises (MNEs) and the causes of FDI outside of macroeconomic principles, his influence on scholars and theories in international business such as is OLI (Ownership, Location and Internationalization) theory by John Dunning and Christos Pitelis which focuses more on transaction costs. In addition, “the efficiency-value creation component of FDI and MNE activities was further strengthened by two other major scientific advances in the 1990s: the resource base (RBV) and evolutionary theory.”
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In addition, some of his predictions later came true, for example the power of supranational bodies such as the IMF or the World Bank that increased inequality (Dunning and Piletis, 2008). Fomon Goal 10 for sustainable development of the United Nations aims to overcome.
Types of FDI investments can be classified based on the perspective of the investor/source country and the host/destination country. From the investor’s perspective, it can be divided into horizontal FDI, vertical FDI and conglomerate FDI. In the destination country, FDI can be divided into import-substituting FDI, export-enhancing FDI, and government-initiated FDI.
Horizontal FDI occurs when multinational companies duplicate the industrial chain of the home country to the destination country to produce the same goods. Vertical FDI occurs when a multinational company acquires a natural resource exploitation company in the destination country (backward vertical FDI) or by acquiring a distribution outlet for the destination country’s product market (forward vertical FDI). Conglomerate FDI is a combination of horizontal FDI and vertical FDI.
The FDI platform is a foreign direct investment from a source country to a destination country with the aim of exporting to a third country.
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Foreign direct investors can acquire the voting power of terprize in the economy through one of the following methods:
A 2010 meta-analysis of the effects of foreign direct investment (FDI) on local firms in developing and transition countries found that foreign investment strongly boosts local productivity growth.
According to a study conducted by EY, in 2020 France is the largest recipient of foreign direct investment in Europe, ahead of the UK and Germany.
EY believes this is “a direct result of President Macron’s labor law and corporate tax reforms, which have been well received by domestic and international investors”.
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Additionally, 24 European Union countries have invested in the military economy since the year of the Armian Indepdce.
FDI into China, also known as RFDI (rminbi foreign direct investment), has increased significantly over the past decade, reaching $19.1 billion in the first six months of 2012, making China the largest recipient of foreign direct investment at the moment and on the top . The US has $17.4 billion in FDI.
In 2013, China’s FDI inflows were $24.1 billion, resulting in a 34.7% FDI market share in the Asia-Pacific region. In contrast, FDI from China in 2013 was $8.97 billion, 10.7% of the Asia-Pacific share.
Foreign investment was introduced in 1991 under the Foreign Exchange Management Act (FEMA), spearheaded by Finance Minister Manmohan Singh.
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India has imposed capital restrictions on foreign investors in various sectors, reducing FDI in the aviation and insurance sectors to a maximum of 49%.
A 2012 UNCTAD survey described India as the second most important FDI destination (after China) for transnational corporations during 2010–2012. According to the data, sectors that attract larger inflows are services, telecommunications, construction activities and computer software and hardware. Mauritius, Singapore, USA and UK are among the main sources of FDI. Based on UNCTAD data, FDI inflows totaled $10.4 billion, a 43% drop compared to the first half of last year.
In 2015, India emerged as the top FDI destination ahead of China and the US. India attracted $31 billion in FDI compared to $28 billion and $27 billion from China and the US.
Of the FDI in the US in 2010, 84% came from or through eight countries: Switzerland, the United Kingdom, Japan, France, Germany, Luxembourg,
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