FDI – FOREIGN DIRECT INVESTMENT

Theoretically, the FDI which stands for "Foreign Direct Investment" refers to an investment in the acquisition of foreign assets with the intent to control and manage them. In fact, such companies can make an FDI in several ways, including purchasing the assets of a foreign company; investing in the company, new property, plants, equipment; or participating in a joint venture with a foreign company which typically involves an investment of capital. Normally, FDI is primarily a long-term strategy where companies usually expect to benefit from it through an access to local markets and resources, often in exchange for expertise, technical know-how, and capital. Subsequently, a country’s FDI can be both inward and outward where the inward FDI refers to investments coming into the country, and the outward FDI are the investments made by companies from that country into foreign companies in other countries. Thus, the difference between inward and outward investments made is called the net FDI inflow, which can be either positive or negative.

Firstly, there are two main categories of international investment – portfolio investment and foreign direct investment. Portfolio investment refers to the investment in a company’s stocks, bonds, or assets, but not for the purpose of controlling or directing the firm’s operations or management. Typically, investors in this category are looking for a financial rate of return as well as diversifying investment risk through multiple markets. As for the FDI which stands for "Foreign Direct Investment" in other definitions, it refers to an investment made from a party in one country into a business or corporation in another country with the intention of establishing a long lasting interest. This is what generally differentiates FDI from foreign portfolio investments where investors passively hold securities from a foreign country, and a foreign direct investment in contrast can be done by obtaining a long lasting interest through the expansion of one’s business into a foreign country.

Secondly, there are two forms of FDI in the realm of international business, namely are horizontal and vertical FDI. The horizontal FDI occurs when a company is trying to establish a new market such as a retailer, for example, that builds a store in a new country to sell to the local market. Whereas the Vertical FDI refers to when a company invests internationally to provide input into its core operations, which is usually in its home country. To illustrate this further, a company may invest in production facilities in another country. When a company brings the goods or components back to its home country (e.g. acting as a supplier), this is known as the backward vertical FDI. However, when a company sells the goods into the local or regional market (e.g. acting as a distributor), this is referred to as forward vertical FDI. In any cases, the largest global companies often engage themselves in both backward and forward vertical FDI depending on their industry.

Thirdly, many companies engage in the backward vertical FDI. The auto, oil, and infrastructure which include industries related to enhancing the infrastructure of a country such as energy, communications, and transportation are good examples of the backward vertical FDI. Companies from these industries invest in production or plant facilities in a country in order to supply raw materials, parts, or finished products to their home country. In recent years, these same industries have also started to carry out forward FDI by supplying raw materials, parts of components, or finished products to newly emerging local or regional markets.

Meanwhile, there are different kinds of FDI – two of which the "Greenfield and Brownfield" are increasingly applicable to global companies. The Greenfield FDI occurs when multinational corporations enter into developing countries to build new factories or stores. These new facilities, in addition, are built from scratch which is usually in an area where no previous facilities existed. As the name originates from the idea of building a facility on a green field, such as farmland or a forested area, companies build new facilities which can best meet their needs as well as create new long-term jobs in the foreign country by hiring new employees. Bottom line, many foreign countries tend to offer prospective companies tax breaks, subsidies, and other incentives to set up the so-called Greenfield investments.

On the other hand, the Brownfield FDI takes place when a company or government entity purchases or leases existing production facilities to launch a new production activity. One application of this strategy is where a commercial site used for an "unclean" business purpose, such as a steel mill or oil refinery to be cleaned up and used for a less polluting purpose, or a commercial office space and a residential area. Usually, the Brownfield investment is less expensive and can be implemented faster, yet, a company may have to deal with many challenges including existing employees, outdated equipment, entrenched processes, and cultural differences.

As we know, many governments encourage FDI in their countries as a way to create jobs, expand domestic technical expertise, and increase their overall economic standards. Such countries as Hong Kong and Singapore long time ago realized that both global trade and FDI would help them grow exponentially and improve their citizens’ standard of living. As a result, Hong Kong (prior to its return to China), was one of the easiest places to set up a new company where the guidelines were clearly available and businesses could set up a new office within days. This is also similar to Singapore albeit the country was a bit more discriminatory on the size and type of business, however, its government offered foreign companies a clear streamlined process for setting up a new firm.