Definition of Foreign Direct Investment (continued)

More on the Definition of Foreign Direct Investment

Types

  1. Horizon FDI arises when a firm duplicates its home country-based activities at the same value chain stage in a host country through FDI
  2. Export-Platform FDI is investment from a source to a host country for the purpose of exporting to a third country.
  3. Vertical FDI takes place when a firm through FDI moves upstream or downstream in different value chains i.e., when firms perform value-adding activities stage by stage in a vertical fashion in a host country.
  4.  Horizontal FDI decreases international trade as the product of them is usually aimed at host country; the two other types generally act as a stimulus for it.

Methods

The foreign direct investor may secure voting power of an entity in an economy through any of the following methods:

  • by incorporating a wholly owned subsidiary or company anywhere
  • by acquiring shares in an associated enterprise
  • through a merger or an acquisition of an unrelated enterprise
  • participating in an equity joint venture with another investor or enterprise

Foreign direct investment incentives may take the following forms:

  • low corporate tax and individual income tax rates
  • tax holidays
  • other types of tax concessions
  • preferential tariffs
  • Special economic or free trade zones
  • EPZ – Export Processing Zones
  • Bonded warehouses
  • investment financial subsidies
  • Soft loans or loan guarantees
  • free land or land subsidies
  • relocation & expatriation
  • infrastructure subsidies
  • R&D support
  • derogation from regulations (usually for very large projects)

FDI has proven — when skillfully applied — to be one of the fastest means of foreign economic growth with the highest impact on development.

Foreign direct investment and the developing world

The effects of foreign direct investment on the local firms in developing and transition countries result in increases in local productivity due to the injected liquidity, infrastructural improvements and more efficient management introduced.

One of the keys to a successful FDI into any country particularly a developing country is the use of an adept local facilitator experienced in the industries of choice and well connected to senior government officials and the mode of operandi within the country. An adept facilitator will be able to expedite and smoothen the due diligence process, any joint venture negotiations and agreements, registration, companies to be selected and invested into and the maneuvering of business logistics and processes. Without your local facilitator, you will likely be unsuccessful in meeting the definition of Foreign Direct Investment. For an adept Investment Capital Management facilitator for US and Sub Sahara Africa’s emerging markets contact us today.

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