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I am new to the stock trading and I want to know as much as possible about the Foreign Direct Investment. Can anybody tell me what is this and how does it works? Can I trade for for the foreign shares through FDI? Is there anybody experiences one who have traded in this type of shares?
Investments that institutional unit resident in an economy performs in order to acquire a lasting interest in an institutional unit resident in another economy and exercise as part of a long-term, significant influence its management. By convention, a direct investment relationship is established when an investor acquires at least 10% of the share capital of the company invested. Direct investment not only includes the early transaction generating the bond between the two units, but also all consequent economical transactions between them and between institutional units, be they or unincorporated companies.
Foreign direct investment are achieved primarily by "external growth". Two vectors are contributing: the programs of privatization of public enterprises launched in industrialized countries as in developing countries since the early 1980s, the giant mergers and acquisitions (OPA - bids - "friendly" or " unfriendly ") for placing transnational firms in an oligopoly situation and provide them as soon as possible the famous critical size designed to protect against attempts by competitors. Such purchases are often feared by those companies that are the subject, their staff and the host country: they reflect less often by creating new subsidiaries and jobs by the closure of establishments or the worst performing in duplicate, as well as through layoffs, the objective being to maximize synergies between the different units of the parent organized in a network, or even destroy competition.
FDI had accompanied the internationalization of enterprises during the nineteenth and early twentieth century, particularly thanks to the establishment of colonial empires. But liberalization and rapid development of international financial markets from 1985 and the consequential establishment of procedures for deregulation of FDI (1996) and innovations in the field of new information technologies and communication (ICT) has caused a dramatic rise in FDI flows worldwide. According to the World Investment Report of UNCTAD, they have continued to grow until 2000, peaking at that date to 1393 billion. The slowdown in global economic activity and the context of uncertainty following the events of September 11, 2001 explain the noticeable decrease in these flows (respectively 824 and 651 billion in 2001 and 2002).
The main stocks of FDI (65% of world total in 2002) are concentrated in two of the three poles of the Triad. The European Union (37%) and the U.S. (19%) along with Canada (3%). Japan (0.83%) or Australia and New Zealand. EU and North America indeed offer the best opportunities, especially in mergers and acquisitions. It counts in addition the vast majority of head offices of transnational corporations. The standard of living of the population is very high and consumers aspire to the same types of products. The risk is by far the lowest. Their economy is characterized by the age of industrialization, the quality of their infrastructure, superior technology and scientific excellence in training their workforce, or the sheer size of consumer markets. For the European Union, the attraction of transnational firms benefited from the signing of the Single Act of 1986 (free movement of goods, capital and persons), followed by the arrival of the euro in 2002, which provides immunity for any competitive devaluations. However we must not forget that the division of the EU in many countries leads to a statistical bias, related to the multiplicity of cross investment between these countries themselves.
Direct investment (FDI) are the means of internationalization of firms. They consist of purchases of corporate securities by non-residents in order to achieve "a lasting interest and ability to influence the management." They may take the form of entrepreneurship, the purchase of an existing business, or simply a stake in the capital of an enterprise, provided that it achieves an effective voice in management. Thus, the creation of a subsidiary of Danone in China (with Chinese partner) is an IDE for Danone (which will result in an outflow of capital from France and a capital inflow in China). More precisely, according to the IMF definition, FDI enjoy four forms:
- The creation of an enterprise or establishment abroad;
- The acquisition of at least 10% of the share capital of a foreign company that already exists;
- Reinvestment of profits by a subsidiary or a branch located abroad;
- Transactions between the parent of a transnational firm and its subsidiaries (subscription to a capital increase, loan, cash advances, etc.)..
In the old industrial countries, FDI may be a way to revitalize the declining industrial regions, which encourages states and local communities to develop their attractiveness to foreign investors. For developing countries, in a context where the bulk of world trade is conducted by multinational companies, FDI is a means to globalize and boost exports. FDI is also a way to benefit from "technology transfer": foreign investors bring with them innovative production processes, methods of organization performance and know-how that will spread gradually across the country and will boost its productivity. The host country has benefited from technological progress without having to finance it.
For the country of origin, the effects are more difficult to evaluate: if FDI is a relocation, there may be, at least in the immediate job losses, while FDI is an implementation which could have been made in the country of origin but is not, nor is it more favorable to employment. However, in the longer term, FDI can generate exports for the country of origin and an additional request from the host country of FDI.
FDI comes almost exclusively from rich countries (OECD), although the Asian region has seen its share multiplied by 14 during the 1990s. In the OECD, the main investor countries were the United States, the United Kingdom, the Netherlands, Germany, France and Japan. In Asia, excluding Japan, the main investor countries were South Korea, China, Singapore and Thailand. FDI flows have grown much faster than trade. They have increased by nearly 5 between 1984 and 1996. If FDI comes mainly from rich countries, they are also mostly for them: the global demand is concentrated in these countries it is normal that they raise many investments. However, the asymmetry is less pronounced here than for the origin of FDI, because Asia and to a lesser extent, Latin America receive a share of increasing FDI.
Foreign Direct Investment is an investment form, that earns interest in enterprises which works outside of the domestic territory of the investor. In FDI, there is a main enterprise and a foreign associate, which combines to form a Multinational Corporation.