Foreign direct investment (FDI) is when an investor becomes a significant or lasting investor in a business or corporation in a foreign country, which can be a boost to the global economy. Foreign direct investment is an active form of cross-border investment where the investor has at least a 10 percent stake in the company.
Types of Foreign Direct Investment
Foreign direct investment is typically more than capital investment, where a business builds a new plant or purchases machinery in a foreign country to increase production. These business expenditures can be part of FDI, if the size or nature of the investment results in control of the foreign business.
FDI also includes investments like expanding a domestic company into a foreign country, investments that result in controlling interest or voting stock of a company, and mergers and acquisitions.
FDI can be “outbound,” where a domestic firm invests in a foreign country, or “inbound,” where a country receives investment from a foreign firm.
Foreign Direct Investment and the Economy
Foreign direct investment is good for the global economy because it spawns international trade, boosts economic development, allows investors to diversify their portfolios, and connects economies.
FDI benefits both the exporting country and the country where the investment takes place. Businesses in the exporting country experience increased access to markets for their products and services, lower labor costs, and access to a more skilled workforce. This generates broader benefits for the exporting country, as businesses that operate globally tend to be more productive and pay their domestic workers higher wages. The host country sees higher employment and increased economic development and growth.
A significant share of global FDI flows through jurisdictions with low corporate tax rates, facilitating investments by companies in both developed and developing countries. The political effort to adopt a global minimum tax applicable to large multinational corporations would directly impact investment decisions of these companies, including FDI, which is sensitive to tax rates.
Policymakers should pursue measures that encourage the free flow of FDI and in turn boost global economic growth. This is especially important since growth in global FDI had stalled prior to 2020, then fell by 38 percent in 2020 to its lowest level since 2005.
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