A foreign direct investment (FDI) is an investment made by a firm or individual in one country into business interests located in another country. Generally, FDI takes place when an investor establishes foreign business operations or acquires foreign business assets in a foreign company. However, FDIs are distinguished from portfolio investments in which an investor merely purchases equities of foreign-based companies.

Foreign direct investments are commonly made in open economies that offer a skilled workforce and above-average growth prospects for the investor, as opposed to tightly regulated economies. Foreign direct investment frequently involves more than just a capital investment. It may include provisions of management or technology as well. The key feature of foreign direct investment is that it establishes either effective control of or at least substantial influence over the decision-making of a foreign business.

Types of Foreign Direct Investment

1. FDI:

It is the investment done by a company or organization which practices all the tasks and activities done at the investing company, back in its own country of operation. Therefore, basically, such investors are from the same industry where investments are done but operating in two different For e.g., a car manufacturer in Australia invests in a car manufacturing company in India.

2. Vertical FDI:

The industry of the investor and the company where investments are done are related to each other. This type of FDI is further classified as:

  1. Forward Vertical FDI: In such investments, foreign investments are done in organizations that can take the products forward towards the For e.g., a car manufacturing company in Australia invests in a wholesale Car Dealer company in India.
  2. Backward Vertical FDI: In such investments, foreign investments are done in an organization that is involved in the sourcing of products for the particular For e.g., the car manufacturer of Australia invests in a tyre manufacturing plant in India.
  3. Conglomerate FDI: Such investments are done to gain control in unrelated business segments and industries in a foreign land. For e.g., the car manufacturer of Australia invests in a consumer durable good manufacturer in India. Here the investing company ideally manages two challenges, first being gaining operational control in a foreign land, and the second being starting operations in a new industry segment.
  4. Greenfield Entry: In this special type of FDI, the investing company refers to an investing organization starting assembling from scratch just like Honda did in the United Kingdom
  5. Foreign Takeover: This type of FDI takes the form of a foreign merger