Dayton Business Daily

what is the difference between foreign direct investment and foreign indirect investment?

Public Comments

1. There are 3 forms of Foreign Direct Investment (FDI): Capital, Reinvested Income, and Inter-company loans. An example of capital is a new office (subsidiary) or equipment for a privatized entity; reinvested income follows as a subsidiary begins to generate a profit and its parent company wants to expand; and inter-company loans can be flow between both the parent company and the subsidiary. Indirect Investment (no known abbrev.) is investing in a country through its national stock or securities market. There is no direct flow from investor to country, as the investor is investing through another company.
2. Another way to look at it is that FDI is an investment in bricks and mortar (more permanent), while the other type is in shares and bonds (easy to get out the country again).
3. Investing directly in production in another country, either by buying a company there or establishing new operations of an existing business. This is done mostly by companies as opposed to financial institutions, which prefer indirect INVESTMENT abroad such as buying small parcels of a country's supply of SHARES or BONDS. Foreign direct investment (FDI) grew rapidly during the 1990s before slowing a bit, along with the global economy, in the early years of the 21st century. Most of this investment went from one OECD country to another, but the share going to developing countries, especially in Asia, increased steadily. There was a time when economists considered fdi as a substitute for trade. Building factories in foreign countries was one way of jumping TARIFF barriers. Now economists typically regard FDI and trade as complementary. For example, a firm can use a factory in one country to supply neighbouring markets. Some investments, especially in SERVICES industries, are essential prerequisites for selling to foreigners. Who would buy a Big Mac in London if it had to be sent from New York? Governments used to be highly suspicious of FDI, often regarding it as corporate imperialism. Nowadays they are more likely to court it. They hope that investors will create jobs, and bring expertise and technology that will be passed on to local FIRMS and workers, helping to sharpen up their whole economy. Furthermore, unlike financial investors, multinationals generally invest directly in plant and equipment. Since it is hard to uproot a chemicals factory, these investments, once made, are far more enduring than the flows of HOT MONEY that whisk in and out of emerging markets (see DEVELOPING COUNTRIES). MERGERS AND ACQUISITIONS are a significant form of FDI. For instance, in 1997, more than 90% of FDI into the United States took the form of mergers rather than of setting up new subsidiaries and opening factories.