Economics – Relationship between countries at different levels of development | e-Consult

Definition: Foreign Direct Investment (FDI) occurs when a firm or individual in one country makes a direct investment in a business located in another country. This investment allows the investor to exert a controlling influence over the operations of the foreign company. This typically involves the transfer of capital, people, technology, and know-how.

Why distinct? FDI is distinct from other forms of international investment (e.g., portfolio investment) because it involves a degree of control. Unlike portfolio investment, where an investor simply buys shares without seeking to influence management, FDI involves a long-term commitment and a desire to control the foreign operation. This control can be achieved through ownership of a significant percentage of the foreign company's shares (usually 10% or more), or through a combination of equity and debt financing. The control aspect is crucial; it distinguishes FDI as a more substantial and strategic form of international economic activity.

Key characteristics of FDI:

• Long-term commitment
• Control over the foreign operation
• Transfer of resources (capital, technology, expertise)
• Strategic importance for both the investor and the host country