Direct Investment
Candlefocus EditorDirect investment, more commonly known as foreign direct investment (FDI), is an essential component of international finance that involves the acquisition of a controlling interest in an enterprise. A primary purpose of FDI is to gain access to know-how, technology, and other resources that could not be obtained through regular stock markets. As per the Organisation for Economic Co-operation and Development (OECD), it is defined as "an investment involving a lasting interest and control by an investor based in one economy (the home economy) in an enterprise that is based in another economy (the host economy)".
In the classic form of direct investment, a company from one country invests in the assets of a business in another country. This is typically associated with the expansion of large multinational corporations. Investment in the host country could be in the form of a new business, such as a new factory or joint venture. It could also be in the form of acquiring existing assets such as business' shares or physical properties such as land or buildings.
Direct investment may take three distinct forms—vertical, horizontal, or conglomerate investment. Vertical investment is when a foreign enterprise either joins the domestic supply chain of a previously-existing firm, or integrates upstream by becoming supplier to the domestic firm. Horizontal investment, in contrast, involves a foreign enterprise entering the same industry as a previously existing domestic firm. In addition, conglomerate investments involve foreign capital entering into different industries other than the one in which the domestic firm is operating.
The global reach of direct investment has been rising steadily since the end of World War II. According to World Bank data, the amount of foreign direct investment in 2019 was $1.54 trillion and accounted for 30% of global cross-border capital flows. Significant strides have been made in recent years, with the developing countries of China, India and Brazil receiving a rising share of the global flow of FDI.
Moreover, multinational companies looking outward for growth are increasingly realising the importance of the host countries in the success of their investments. Research demonstrates that FDI has an important role to play in creating job opportunities and developing the countries in which investments are made. Establishing a legal and regulatory framework that encourages FDI is a particularly effective tool for the development of the host country.
In conclusion, FDI is a critical component of international finance that involves the acquisition of a controlling interest in an enterprise. It can take the form of vertical, horizontal, or conglomerate investment. Over the past few decades, it has grown significantly, not only in terms of magnitude but also its reach to developing countries. It is an effective tool for development as it facilitates job creation and a better investment environment for the host countries.