When a foreign business undertakes a new project or expands its operations within the foreign country, it is called a foreign direct investment (FAI). The primary objective of FDI is to provide foreign companies with an opportunity to participate in the local economic activity. The following are the main types of FDI.
Bilateral investment: A bilateral investment occurs when two foreign businesses to enter into a commercial agreement for a specific project. The cost of this agreement will be shared by both parties. For example, if a German company intends to set up a factory in India, it will approach various Indian companies for investments. If one of these companies accepts the offer, then the company will be able to use the facility for its own operations. In return, the Indian firm will be able to use the factory for its operations. Under this type of foreign direct investment, both the foreign company and the Indian company benefit.
Facilitation funds: Facilitation funds refer to foreign direct investment that happens without the involvement of any third party. The foreign direct investment takes place through lending funds from either a foreign bank or a private financial organization. The lending institution will invest the funds in the domestic market and the foreign investor will use the money to purchase raw materials and pay wages to workers in the domestic market. The profit made from such an investment will be partly or completely tax-free.
Treaties: A number of international agreements have been signed that bring into existence a system of foreign direct investment rules. One of the most common is the Vienna Convention, which came into force in 2021. This convention provides for the laying down of certain principles on foreign investment policy, including those related to fair treatment of foreign investors. The EU and the US are parties to this convention.
Structures: There are many cases where companies need foreign direct investment. Usually, when such investment takes place, the business is established in the host country and works there for several years. Then, at the end of the contract, either party can decide to transfer the company to another country, or to sell it. If a foreign direct investment occurs, both the foreign investor and the host country gain something.
Direct regulation: Another area in which foreign direct investments take place is through the implementation of investment legislation in the host country. Usually, this regulation is implemented by the government, although it can be implemented by a private investor as well. When the government implements investment legislation, it tries to implement it in a way that benefits the foreign investors more than the host country. Some examples are the following: ensuring that investment funds are not controlled and misused, making sure that the laws on investment apply to foreign investors and requiring an annual review of the performance of the law.
Registration: Similar to regulation is registration. Foreign direct investments are registered in the country where the company is incorporated. This involves payment of taxes and paying the payroll taxes of the company. The register can also be used to ensure that foreign investors receive their full rights as a foreign investment.
Disregard of some terms: Many people often confuse the term FDI with foreign direct investment. While both are one and the same, FDI is actually a term used to refer to foreign direct investment. In this case, the term refers to the flow of funds from a foreign country to a domestic entity. On the other hand, FDI refers to the actual investment itself.
Regulating investment in foreign countries: Another area in which the role of foreign direct investment has been vastly over-simplified is in its regulation. For instance, all firms dealing with foreign investments must have a registration form for investors, who must then go through a series of national screening processes in order to be accepted. Moreover, all such firms have to submit annual reports to the authorities. However, these reports are often inadequately documented or inaccurate.
Treatment of foreign direct investment: Though most countries lay emphasis on foreign direct investment, there are some exceptions where such rules are not followed. In India, for instance, foreign direct investment rules are frequently flouted due to lack of awareness and lack of resources. However, the government has made amendments to increase the control of FDI and has introduced a transparent and simpler law. Similarly, in Indonesia, foreign investors are not properly screened before they get permission to start a business.
Restrictions on foreign direct investment (fdi): There are also several restrictions that are imposed on the transfer of foreign investment. Most countries have rules that prevent a foreign company from directly investing in a firm in another country. Moreover, most countries disallow foreign direct investment unless the foreign company has signed an agreement allowing it to do so. There are many instances where a country does not allow a foreign direct investment, either because the market does not warrant it or because the local economy is not capable of producing large amounts of foreign investment.