Foreign Direct Investment (FDI)

Foreign Direct Investment (FDI) is a pivotal component of the global economy, facilitating international collaboration, economic growth, and technological advancement. This article explores the concept of FDI, its various types, benefits, real-world examples, and addresses frequently asked questions to comprehensively understand its role in today’s financial landscape. 

What is Foreign Direct Investment (FDI)? 

Foreign Direct Investment (FDI) occurs when an individual, company, or government from one country invests in business interests located in another country. Unlike portfolio investments, which involve purchasing stocks or bonds, FDI typically entails acquiring a significant ownership stake commonly defined as 10% or more of voting securities in a foreign enterprise. This level of investment grants the investor substantial control and influence over the foreign business’s operations.  

FDI can manifest in various forms, such as establishing new operations (greenfield investments), acquiring existing businesses (mergers and acquisitions), or forming joint ventures with local firms. The defining characteristic of FDI is its intent to establish a long-term interest and active participation in managing the foreign enterprise.  

Understanding Foreign Direct Investment (FDI) 

FDI is a critical driver of globalisation and economic integration. It extends beyond mere capital transfer by often involving the exchange of technology, expertise, and managerial practices. Investors are typically drawn to countries with open economies, skilled workforces, and favourable regulatory environments.  

For instance, the United States has historically been a top recipient and contributor of FDI due to its robust legal framework, large consumer market, and technological leadership. Similarly, Singapore has emerged as a global hub for FDI because of its transparent governance, business-friendly policies, and strategic location in Asia

Types of Foreign Direct Investment (FDI) 

FDI can be categorised into several main types based on the mode of entry and investment objectives: 

1. Greenfield Investments

This involves establishing entirely new operations in a foreign country by building new facilities from the ground up. For example, a technology company setting up a new data centre in a foreign market would be considered a greenfield investment.  

2. Mergers and Acquisitions (M&A)

This entails acquiring or merging with an existing foreign company, providing immediate access to established operations, market presence, and customer base. An example would be a multinational corporation acquiring a local firm to expand its footprint in that market.  

3. Joint Ventures

This involves forming a partnership with a foreign company to undertake business activities together, allowing for shared risks, resources, and expertise. For instance, two companies from different countries collaborating to develop new technology would constitute a joint venture.  

4. Reinvestment of Profits

This refers to reinvesting earnings from existing foreign operations back into the foreign business to expand or improve operations.  

Benefits of Foreign Direct Investment (FDI)

FDI offers numerous advantages to both investors and host countries: 

• Economic Growth: FDI stimulates economic growth by providing capital, creating jobs, and enhancing productivity through technology and expertise transfer.  

• Technology Transfer: Foreign investors often bring advanced technology, management practices, and expertise, which can enhance productivity and innovation in the host country.  

• Employment Generation: By establishing new businesses or expanding existing ones, FDI creates job opportunities for local populations, contributing to economic growth and improved living standards.  

• Infrastructure Development: FDI often involves investments in infrastructure, such as transportation, telecommunications, and energy, benefiting the host country’s overall development.  

• Export Promotion: Host countries often become export hubs for foreign investors due to lower production costs, increasing their global trade presence. 

• Industrial Diversification: FDI reduces reliance on specific industries by encouraging growth across multiple sectors, leading to a more resilient economy. 

• Access to Capital: It provides local businesses with much-needed financial resources for expansion and innovation, fostering entrepreneurial growth. 

• Stimulated Competition: The entry of foreign firms fosters healthy competition, improving product quality and consumer choice. 

Examples of Foreign Direct Investment (FDI) 

Example 1: TSMC’s Investment in the United States 

In a significant move to expand its global footprint, Taiwan Semiconductor Manufacturing Company (TSMC) announced a US$100 billion investment in advanced chip-making facilities in the United States. This investment includes the establishment of three new chip fabrication plants in Arizona, two advanced packaging plants, and a research and development centre, collectively expected to create between 20,000 and 25,000 jobs. This strategic decision aims to mitigate potential tariffs on chip imports and strengthen the U.S. semiconductor industry.  

Example 2: Salic’s Acquisition of Olam Agri in Singapore 

A Saudi Arabian investment company, Salic, a Saudi sovereign wealth fund subsidiary, acquired a 44.6% controlling stake in Singapore-based commodities trading group Olam Agri for US$1.78 billion, valuing Olam Agri at US$4 billion. This acquisition aligns with Saudi Arabia’s strategy to diversify its economy and secure critical agricultural supply chains, providing direct access to sourcing and logistics networks across Asia,

Frequently Asked Questions