Definition of foreign direct investment

Investment from one country into another (normally by companies rather than governments) that involves establishing operations or acquiring tangible assets, including stakes in other businesses. [1]

The purchase or establishment of income-generating assets in a foreign country that entails the control of the operation or organisation.

FDI is distinguished from portfolio foreign investment (the purchase of one country’s securities by nationals of another country) by the element of control. Standard definitions of control use the internationally agreed 10 per cent threshold of voting shares, but this is a grey area as often a smaller block of shares will give control in widely held companies.  Moreover, control of technology, management, even crucial inputs can confer de facto control.

FDI is not just a transfer of ownership as it usually involves the transfer of factors complementary to capital, including management, technology and organisational skills.

Strategically FDI comes in three types:

- Horizontal: where the company carries out the same activities abroad as at home (for example, Toyota assembling cars in both Japan and the UK. 

- Vertical: when different stages of activities are added abroad. Forward vertical FDI is where the FDI takes the firm nearer to the market (for example, Toyota acquiring a car distributorship in America) and Backward Vertical FDI is where international integration moves back towards raw materials (for example, Toyota acquiring a tyre manufacturer or a rubber plantation). 

- Conglomerate: where an unrelated business is added abroad. This is the most unusual form of FDI as it involves attempting to overcome two barriers simultaneously - entering a foreign country and a new industry.  This leads to the analytical solution that internationalisation and diversification are often alternative strategies, not complements.

FDI can take the form of greenfield entry or takeover.

Greenfield entry implies assembling all the elements from scratch as Honda did in the UK, whereas foreign takeover means the acquisition of an existing foreign company - as Tata’s acquisition of Jaguar Land Rover illustrates.

Foreign takeover is often covered by the term 'mergers and acquisitions’ (M&As) but internationally, mergers are vanishingly small, accounting for less than 1 per cent of all foreign acquisitions.

This choice of entry mode interacts with ownership strategy – the choice of wholly owned subsidiaries versus joint ventures to give a 2x2 matrix of choices – greenfield wholly owned ventures, greenfield joint ventures, wholly owned takeovers and joint foreign acquisitions - giving foreign investors choices that they can match to their own capabilities and foreign conditions. [2]