Definition of foreign direct investment

Investment from one country into another (normally by companies rather than
governments) that involves establishing operations or acquiring tangible assets,

including stakes in other businesses.

The purchase or establishment of income-generating assets in a foreign country that
entails the control of the operation or organization.
o Standard definitions of control use the

internationally

agreed

10

per cent threshold of voting share (Organization for Economic Cooperation and
Development OECD). Moreover, control of technology, management, even
o

crucial inputs can confer de facto control.

FDI is not just a transfer of ownership/control as it usually involves the transfer
of factors complementary to capital, including management, technology and
organizational skills.

Difference between FDI and PFI

-

FDI is distinguished from portfolio foreign investment (the purchase of one countrys
securities by nationals of another country) by the element of control.

Methods to acquire voting

power/control
-

The foreign direct investor may acquire voting power of an enterprise in an economy
through any of the following methods:

by incorporating a wholly owned subsidiary or company anywhere

by acquiring shares in an associated enterprise

through a merger or an acquisition of an unrelated enterprise

participating in an equity joint venture with another investor or enterprise

Methods to attract Foreign Direct

Investors
-

Foreign direct investment incentives may take the following forms:

low corporate tax and individual income tax rates

tax holidays

other types of tax concessions

preferential tariffs

special economic zones

EPZ Export Processing Zones

Bonded warehouses

Maquiladoras

investment financial subsidies[8]

free land or land subsidies

relocation & expatriation

infrastructure subsidies

R&D support

derogation from regulations (usually for very large projects)

Three types of Foreign Direct

Investment
1. Horizontal: where the company carries out the same activities abroad as at home (for
example, Toyota assembling cars in both Japan and the UK.
2. Vertical: when different stages of activities are added abroad.
- Forward vertical FDI is where the FDI takes the firm nearer to the market (for example,
Toyota acquiring a car distributorship in America) and
- Backward Vertical FDI is where international integration moves back towards raw
materials (for example, Toyota acquiring a tire manufacturer or a rubber plantation).

3. Conglomerate: where an unrelated business is added abroad. This is the most unusual form
of FDI as it involves attempting to overcome two barriers simultaneously - entering a foreign
country and a new industry. This leads to the analytical solution that internationalization and
diversification are often alternative strategies, not complements.

Importance of Foreign Direct

Investment.
1. Improved economic growth due to the influx of capital and increased tax revenues for the
host country
2. Host countries often try to channel FDI investment into new infrastructure and other projects
to boost development.
3. Greater competition from new companies can lead to productivity gains and greater
efficiency in the host country.
4. The application of a foreign entitys policies to a domestic subsidiary may improve corporate
governance standards.
5. Foreign investment can result in the transfer of soft skills through training and job creation.

6. The availability of more advanced technology for the domestic market and access to research
and development resources.

Forms of Foreign Direct Investment

FDI can take the form of greenfield entry or takeover.
1. Greenfield entry implies assembling all the elements from scratch as Honda did in the UK,
whereas
2. Foreign takeover means the acquisition of an existing foreign company - as Tatas acquisition
of Jaguar Land Rover illustrates.
Foreign takeover is often covered by the term 'mergers and acquisitions (M&As) but
internationally, mergers are vanishingly small, accounting for less than 1 per cent of all
foreign acquisitions.

FDI Inflows By Countries and Industry

Main Investing

2013, in %

Countries
British Virgin

33.9

Islands
The United States

20.2

Japan

16.3

Netherlands

9.1

Singapore

3.4

South Korea

3.1

Caiman Islands

2.7

Main Investing

2013, in %

Countries
Australia
Main Invested

1.6
2013, in %

Sectors
Manufacturing sector

28.3

Administration,

6.3

Electricity, water, gas

27.2

Transport

20.2

Hotels, catering

9.3

Others

9.0

Form of Company Preferred By Foreign Investors

-

Joint-stock company

Main Foreign Companies

-

Lafarge, Philips, Shell, Intel, Texas Instrument, ING, Cemex

Why You Should Choose to Invest in

the Philippines
Strong Points
The country's main strong points are:
- A skilled English-speaking workforce;
- A large domestic market;
- Its membership to ASEAN;
- A favorable investment policy;
- A very advanced legal system;
- A strategic location at the Asian gateway; and
- Considerable natural wealth.

Weak Points
The country's weak points lie in its political instability, the bad quality of its
infrastructures, judicial precariousness and lack of transparency.
Government Measures to Motivate or Restrict FDI
Laws liberalizing business practices have opened up more fields to foreign investments
and have provided foreign investors with the same incentives as ASEAN members, as
well as simplified procedures.