Foreign Direct Investment Overview

Foreign Direct Investment (FDI) Overview

• Stock of FDI represents the total accumulated value of foreign-owned assets at a specific point in time.
• Outflows of FDI indicate the funds invested by a home country into foreign countries.
• Inflows of FDI reflect investments made by foreign firms into the local country.

Importance of FDI

• FDI is crucial for integrating the global economy and expanding international business operations.
• Increased mobility of production factors makes FDI a key strategy for corporations.
• FDI involves acquiring ownership of overseas business entities to manage and control them.

Types of Investments

• Foreign portfolio investment involves acquiring financial instruments like stocks and bonds rather than real assets, typically involving lower risk and no direct management control.
• FDI targets real or physical assets, such as factories and facilities, ensuring effective management and control of foreign production operations.

Entry Strategies for International Markets

• Exporting is a lower-risk strategy for entering foreign markets but lacks management control over operations in the target country.
• FDI allows firms to gain direct access to local markets and leverage opportunities unavailable through mere exporting.

Types of FDI

• Inward FDI refers to foreign firms investing in and controlling domestic assets, exemplified by Coca-Cola's bottling facilities around the globe.
• Outward FDI occurs when domestic firms invest abroad to acquire control over foreign operations, like Citigroup's acquisition of Confia in Mexico.
• Foreign subsidiaries are units established due to FDI, facilitating foreign market penetration and local operational management.

FDI Classification

• Horizontal FDI involves investment in the same industry abroad to achieve market share, whereas vertical FDI pertains to investments along the supply chain, either backward or forward.

Conceptual Considerations

• Portfolio Theory addresses the behavior of investors managing large financial assets aiming for optimal risk-adjusted returns.
• Financial risk is identified as the variability in returns on an asset over time, highlighting the importance of strategy in investment decisions.