Foreign direct investment -Types, Nature, Objectives, Advantage, Theories and Growth

Foreign Direct Investment

Investments made directly into corporate operations in a foreign nation are referred to as foreign direct investment. In other words, foreign direct investment is the act of transferring funds across international boundaries with the intention of actively managing real estate and business ownership in a foreign country. An organization becomes a multinational corporation or multinational enterprise when it makes a foreign direct investment. Another kind of foreign direct investment is when a business purchases an already-existing entity abroad. Therefore, capital investments made by one country to another constitute foreign direct investment. You can accomplish it by

• Establishing a subsidiary for regional production. It is a corporation that is entirely owned and managed.
• Purchase of an existing foreign corporation.
• Involvement in a partnership project with a local partner.
• A portfolio investment in foreign company stock.
• Assistance with a project for a foreign corporation.

Types of foreign direct investment

There are primarily two types of foreign direct investment. Those are

• Greenfield investment and acquisitions: Direct investment acquisition is another name for greenfield investment. Greenfield investments and acquisitions are made to launch a completely new business or sector abroad. It may also include purchase, in which case a company might buy another foreign firm for a minority stake of between 10% and 49%, a majority ownership of between 50% and 99%, or even a full outright stake. A business can also invest directly in a foreign endeavor by purchasing a sizeable portion of the stock in the business of another nation. Acquisition is the process of purchasing a large enough stake in a company located in another foreign nation.
• Foreign portfolio investment: An investment in foreign financial instruments may be made by a person, business, or public institution. Examples include international stocks, government money, etc. A return on the invested cash is the goal of such share and bond purchases. Importantly, investing in a foreign portfolio does not entail acquiring a sizable stock share in a foreign company. so that fewer than 10% of the entity is involved. Foreign portfolio investments are also referred to as noncontrolling interests because they often have no intention of controlling the company and only seek to generate a profit.

Nature of foreign direct investment

• Horizontal and vertical foreign direct investment
  • Investments made in the same sector overseas as those made domestically are referred to as horizontal foreign direct investment. As an illustration, if the Nepal Oil Corporation, which sells oils in Nepal, opens a branch in India to sell oils, that is considered a horizontal foreign direct investment. Foreign direct investment is vertical if it is made in Qatar's energy and natural resources.
  • Dabur India has made investments in Nepal's Ayurvedic herbal product, dental product, and other related industries. Vertical foreign direct investment, on the other hand, refers to investments made in a foreign industry that sells or provides inputs to a company's domestic business. There are two forms of vertical foreign direct investment. They are foreign direct investments that are vertically moving backward and forward.
  • Oil extraction, copper mining, and other extractive industries all get backward vertical foreign direct investment. It is thus because they import copper and oil from foreign mines and employ these raw materials in their real-time domestic operations for producing copper and refining oil, respectively. Extractive industries import raw materials and utilise them domestically. Forward vertical foreign direct investment is when a company sells its local products to a foreign industry. Less often than rearward, vertical foreign direct investment.

Objectives of foreign direct investment

The goals of foreign direct investment are listed below.

• Increase overseas market sales.
• Obtain access to supplies of raw commodities.
• Profit from the low cost of labor.
• Transferring money, technological management, and marketing know-how to other nations.

Advantages of foreign direct investment

• Capital transfer: An significant way for foreign governments to transfer cash is through foreign direct investment. The ability to balance capital among nations is a huge help for international commerce.
• Productivity improvement: Technology transfer is facilitated by foreign direct investment. Productivity growth is a result of technical advancement.
• Management development: Local managers receive training from overseas companies. They learn new management concepts, techniques, and technologies. There is management development. improvement in productivity
• Employment: Visiting a foreign country creates new jobs. Excellent work prospects are provided by the direct investment system on a global scale.
• Better product quality: The best product on the market is produced with the aid of foreign direct investment.
• Export: Around the world, foreign direct investment contributes to higher sales. It aids in the market expansion of global commerce.

Foreign direct investment as an alternative to trade

While international trade and investment are two significant components of international business, foreign direct investment has recently become a viable alternative. International trade has historically played a significant role in the economic growth of several nations for at least the past 150 years, but the wave of foreign direct investment difficulties has just come to light. Between 1946 through the middle of the 1960s, US firms began making foreign direct investments in western Europe. Similar to how rich nations favor commerce while underdeveloped nations favor foreign direct investment Foreign direct investment and trade both have a mutual impact. Trade in emerging nations is boosted by foreign direct investment. Foreign manufacturing supported by foreign FDI reduces trade with industrialized nations. Investment is becoming a more and more important component of trade.

Therefore, trade and foreign direct investment are complementary. Foreign direct investment is preferred by developing nations above influence from rich nations. For them, foreign direct investment is a significant and advantageous substitute for import-related trade. Establishing manufacturing facilities through foreign direct investment also encourages export to industrialized nations.

Foreign direct investment theories

International foreign direct investment is explained by the theory. The key theories are as follows:

• Product life cycle: According to this idea, the product's manufacturing location will change to a different category stage in a different country. For instance, the USA might create a new product before exporting it to other developing markets. As competition grows, manufacturing is moved to other wealthy nations. Manufacturing is moving to emerging nations as competition becomes more fierce.
• Market imperfection theory: According to this idea, foreign investment is a result of market imperfections. There is intense competition between the nations in a global market. For instance, in a global corporate setting, the US and the UK seized a greater range of markets. Because this theory is based on market covering range at an international level, their standard determination is high rank applied Kindle Berger imperfection theory.
• Monopolistic advantage theory: The term "imperfect market" or "market imperfection" refers to a market that lacks perfect competition. Consider a market that is monopolistic. Stephen Hymer put forth this notion in the 1960s. According to this view, oligopolistic industries account for a considerable portion of foreign direct investment. The choice to invest in the international market is based on several advantages that foreign companies have over domestic companies. Scale economies, better technology or skill management, production, marketing, analyzing, directing, handling, and financing process are all possibilities. Due to the defects in the local enterprises' product markets, there is a monopolistic advantage over them.
• Electric theory: This hypothesis is referred to as "miscellaneous theories" since it includes the divergent components of a few ideas regarding foreign direct investment. As Jhon Dunning described it in his 1988 book "Explaining International Production," this theory is also known as the Dunning Electric Theory of International Production. According to this idea, a company makes investments abroad because of the following three comparative advantages.
  • Advantages related to ownership: When a company invests abroad, it can take advantage of monopolistic advantages as well as technological advancements.
  • Advantages specific to a location Due to the geographical benefits, which include physical, economic, and political advantages, a company making an international investment can make more money. The company can be in an all-win scenario if the political system and the administration of that foreign country offer a free business environment, discounts, and incentives in business through economic policies. The corporation may benefit more if physical resources are available in that nation.
  • Advantages of internationalization: When a company invests internationally, it can earn more money by licensing, franchising, or exports than it would by operating locally. In order to receive higher returns on technology, inter-property rights, and management royalties from other foreign countries, a company can move its superior technology or management to those nations.

Growth trends of foreign direct investment

Global foreign direct investment inflows decreased, although they recovered from 2010 and continued through 2013. This is according to the World Investment Report. Due to the vulnerability of global economic policy uncertainty and elevated geopolitical risk, inflows decreased by 16% in 2014.An increase in inbound foreign direct investments into emerging economies: Of the top 10 countries worldwide to receive such investments, five are in developing nations.

According to "UNCIAP'S" most recent study on foreign direct investment, the following points outline the growth and direction of foreign direct investment globally.

• In 2008 and 2009, foreign direct investment substantially drops, however it is currently rebounding since 2010. It is anticipated that foreign direct investment will total $ 1.6 trillion in 2014 and $ 1.8 trillion in 2015. 2013 World Investment Report by UNCIAD
• As countries have kept up with their programs of economic liberalization, foreign direct investment is anticipated to increase. As more nations participate in bilateral and regional economic cooperation, liberalization has accelerated. NAFTA, NAFTA, EU, BIMSTEC, and ASEAN are a few examples.
• The number of cross-border mergers and acquisitions has risen. It is a sign that foreign direct investment has increased in the form of mergers and acquisitions.
• The importance of transnational corporations' (TNC'S) contributions to the world economy and industry has been highlighted.
• The demand for foreign direct investments in the construction of infrastructure is rising.
• There has been a significant movement toward the service industries in terms of global foreign direct investment. It implies that investing in the service sector is also important.

Growth trend in Nepal

• Foreign direct investment inflow rose after the restoration of democracy in 1990 as government followed liberal and open market policies.
• Foreign investment and technology transfer Act was implemented in 1992 to replace earlier Act 1981 that favored foreign direct investment inflow.
• The slow increase of foreign direct investment inflows into Nepal is attributed to political unrest.
• Foreign direct investment inflows are anticipated following the passage of the constitution transforming Nepal into a federal democratic republic in September 2015.

References

Johnson G., Scholes K., Whittington R. (2008). Exploring corporate strategy (8thed.). Pearson:Edinburgh Gate, Prentice hall

Pearce, J.A., & Robinson, R.B. (2012).Strategic management: Formulation, Implementation, and Control.New York: McGraw Hill Irwin