Foreign Direct Investment

Overview of Foreign Direct Investment
The phenomenon of foreign direct investment has been explained as being the investment that is made with the purpose of getting substantial profits from a business entity that is working away from the economic boundary of the investor.
Transactional Procedure of Foreign Direct Investment
Whenever a multinational company wants to make foreign direct investment in a particular country it sets up a branch office over there. Through that affiliated body the particular multinational company channelizes its foreign direct investment.
Qualification Process of Foreign Direct Investment
The multinational companies need to fulfill certain requirements before they are recognized as foreign direct investors. The particular multinational company has to own at least 10 percent of the shares of the affiliated body through which it intends to carry on its foreign direct investment process.

The parent company should also have voting power if it is an incorporated company. If the affiliate is not an incorporated entity then the parent company needs to have some authority, which is same as having the power to vote in an incorporated business entity.

These parameters have been laid down by the United Nations. They are applicable for any company that may want to make foreign direct investment.

Forms of Foreign Direct Investment
There are several forms of foreign direct investment:

By Direction
By Motive
By Target
The various kinds of foreign direct investments could be further divided:

a) By Direction

Outward
Inward
b) By Motive

Strategic-Asset Seeking
Resource-Seeking
Efficiency-Seeking
Market-Seeking
c) By Target

Vertical FDI
Greenfield Investment
Horizontal FDI
Mergers and Acquisitions
Following are the various types of Vertical FDI:

Forward Vertical FDI
Backward Vertical FDI

Inward Foreign Direct Investment
If foreign capital is put in locally available resources it is known as inward foreign direct investment. The following factors play a positive role in the context of inward foreign direct investment:

Tax Breaks
Grants
Subsidies
Reversing of Sanctions
Loans having Lower Rates of Interest
The following factors normally have a negative effect on inward foreign direct investment:

Variety of Performance Requirements
Restraints or Limits on Ownership
Outward Foreign Direct Investment
If locally available capital is put in resources that are available in offshore locations it is known as outward foreign direct investment.

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Last Updated on : 1st July 2013

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