What is Foreign Direct Investment?

Foreign Direct Investment (FDI)
Foreign Direct Investment (FDI)-Image Source: Business Standard

A foreign direct investment (FDI) is an investment made by a firm or individual in one country into business interests in another country. FDI takes place when an investor establishes foreign business operations or acquires foreign business assets in a foreign company. Investors commonly make them in open economies that offer a skilled workforce and above-average growth prospects for the investors. Foreign direct investment frequently involves more than just a capital investment. It may include provisions of management or technology as well. The key feature of foreign direct investment is that it establishes either effective control of or at least substantial influence over the decision-making of a foreign business.

Foreign direct investments are commonly categorized as being horizontal, vertical, or conglomerate. A horizontal direct investment refers to the investor establishing the same type of business operation in a foreign country as it operates in its home country. A vertical investment is one in which different but related business activities from the investor’s main business are established or acquired in a foreign country. And a conglomerate type of foreign direct investment is one where a company or individual makes a foreign investment in a business that is unrelated to its existing business in its home country.

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