Foreign Direct Investment (“FDI”) is an investment that is made by one individual or entity in one country to own or vest an interest into business that is based and/or operating in a different country. It is different from a portfolio investment where an individual or entity only invests in the assets of another business. FDI allows foreign investors to be involved in the operations of the entity including the purchase of equity, which includes contributing their relevant knowledge, skills and expertise.
There are many forms of an FDI, such as horizontal, vertical and conglomerate. In the case of the former, the entity is directed at setting up a business that is similar to the present entity but based and operating in another country whereas a vertical FDI is towards a related but different business. A conglomerate FDI is in relation to a completely unrelated business venture. There are multiple methods in which investors may acquire voting rights and power in a foreign entity as part of FDI and some of which include mergers and acquisitions, joint ventures with foreign entities and the creation of subsidiaries in a foreign country.
FDI is often exercised in both the private and public sectors as such investment allows international investors to expand and enter into international markets and economies, which would in turn allow such investors to diversify their business and revenue. Governments are generally keen to encourage FDI, as it creates more job opportunities and promotes economic growth. Incentives for FDI investors include market diversification and tax incentives which are predominant in most countries to encourage FDI. Different countries encompass different laws and regulations pertaining to FDI and whilst some countries include specific FDI laws, some do not. As such, tax incentives and the amount of incentives offered to foreign investors also differ within countries around the world.
