What is Foreign Direct Investment?

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Foreign Direct Investment illustration

Foreign direct investment (FDI) is a business decision to invest or acquire a stake in a foreign business or outrightly buy it out for expansion into another region or country.

FDI is not limited to only stock investment in a foreign company. It can involve establishing a full-blown business in a foreign country as well.

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Examples of Foreign Direct Investment

Here are different ways in which an individual, corporate entity, or the government of a country can invest in a foreign country:

1. Mergers

A merger occurs when an operating business in a country decides to merge or combine its operational activities with another business or company in a foreign country.

It is often done when the company needs expansion into a foreign nation. 

2. Acquisition

Acquisition is one of the most commonly used strategies in FDI.

It happens when an individual, company, or government decides to buy out another business in a foreign country.

The value of money or cash transferred for the acquisition can be referred to as FDI.

A relatively recent example is the acquisition of Paystack, a payment processing company in Nigeria by Stripe, which is another company in the United States of America.

This acquisition was carried out as an expansion effort into the Nigerian-African market.

3. Partnerships

A partnership is a situation where a business or government of a country comes together to carry out collaborative business activities for the benefit of the parties involved. 

In a partnership, depending on the agreement made, there is always a benefit attached to the parties involved, which could be qualitatively or financially measurable.

These three are the most common examples of foreign direct investments.

Other examples of FDI can be through Manufacturing, Sales Offices, Facilities, Retail, Logistics, and Research and Development.

Types of Foreign Direct Investment

1. Horizontal

With a horizontal FDI, an individual or corporate entity establishes or invests in the same type of business operation in another foreign region or nation of the world just as her original type of operation in her home country. 

Just as the example of Paystack, Stripe and Paystack operate in the same line of business, which makes it a horizontal type of FDI.

2. Vertical

In vertical foreign direct investment, a business or government body of a nation invests, establishes, or buys out another complementary business in a different country or nation. 

With a vertical type of foreign investment, a company does not invest in a company that operates in the same line of business as hers.

It could decide to invest in another company in another region, providing her with raw materials for her operations.

3. Conglomerate

In a conglomerate foreign direct investment, an individual or business entity invests in a business in another country that is not related to its original line of business operations. 

A conglomerate FDI is different from a horizontal or vertical foreign direct investment because it does not focus on a business that is in the same line or in relation to its core line of operation.

How to attract Foreign Direct Investment in Nigeria

According to a recent This Day report, an investment-friendly environment helps contribute to and attract foreign direct investment.

The government of Nigeria at all levels needs to create a friendly environment for businesses to thrive to attract FDI which will further help to improve the state of the economy. 

The government needs to look into issues like providing good road networks, stable power supply, little to no import duties fees, a labour reward system, and favourable policies & regulations.

To attract FDI into the country, the government will need to implement different strategic policies which will enhance and encourage FDI into the country. 

How beneficial is Foreign Direct Investment for developing countries?

FDI helps in contributing to the financial status of a nation through the payment of tax and other levies. 

FDI also impacts the lives of a country’s citizens through the provision of employment, improvement in the standard of living of the people, increase in per capita income, etc.

Factors affecting Foreign Direct Investment

1. Political instability

The periodic changes in the leadership of a foreign nation can affect the operational activities of a company’s foreign direct investment.

2. Changes in the exchange rate

Over time, there have been insistent fluctuations in the exchange rates of currencies of different countries.

These changes could affect the value of the foreign direct investment.

For instance, when exchange rates appreciate, it increases the cost of production in a country as a result of currency depreciation. 

3. Modern-day economic colonialism

Many countries do not encourage foreign direct investment, because of the fear of modern-day economic colonialism.

Bottom Line

FDI is a substantial part of the Gross Domestic Product of many smaller, underdeveloped, and developing countries. We have also seen that it is a strategic way for individuals, businesses, and the government of a nation to tap into the opportunities and wealth of another country or region.

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