Foreign Direct Investment (FDI)


A foreign direct investment (FDI) is an investment in the form of a controlling interest in a company in one country by an entity based in another country. It is thus distinguished from foreign portfolio investments by a concept of direct control. In foreign portfolio investments, an investor simply buys shares of companies based abroad.

Broadly speaking, foreign direct investment includes “mergers and acquisitions, construction of new facilities, reinvestment of profits from overseas operations and intra-company loans”. In a narrow sense, foreign direct investment simply refers to the construction of new facilities, a sustainable management stake (10% or more of the voting shares) in a company operating in an economy other than that of the United States. investor. FDI is the sum of equity, other long-term capital, and short-term capital, as shown in the balance of payments. FDI generally involves participation in management, joint venture, transfer of technology and expertise. The stock of FDI is the net cumulative FDI (i.e. outward FDI minus inward FDI) for a given period. Direct investment excludes investment through the purchase of shares.

Who can be a foreign investor?

A foreign direct investor can be classified in any sector of the economy and can be one of the following:

  • An individual;

  • A group of related individuals;

  • An incorporated or unincorporated entity;

  • A public company or a private company;

  • A group of related companies;

  • A government agency;

  • An estate (law), trust or other societal organization; or

  • Any combination of the above.

How can a foreign investor invest his funds?

A foreign direct investor can acquire the right to vote of an enterprise in an economy by any of the following methods:

  • By incorporating a subsidiary or a wholly owned business anywhere.

  • By acquiring shares in an associated company.

  • Through a merger or acquisition of an independent company.

  • Participate in a joint venture with another investor or another company.

FDI incentives:

Incentives for foreign direct investment can take the following forms:

  • Low corporate and personal tax rate

  • tax exemptions

  • other types of tax benefits

  • preferential rates

  • special economic zones

  • ZFE – Export Processing Zones

  • Bonded warehouses

  • maquiladores

  • financial investment grants

  • free land or land subsidies

  • moving & expatriation

  • infrastructure subsidies

  • R&D support

  • Energy

  • deviation from regulations (usually for very large projects)

  • by excluding internal investment to obtain a profit downstream.

Company structures:

Various business structures are available for setting up a place of business. There are three (03) ways, by which, a foreign company can have its presence in the country:

  1. Liaison office;

  2. Branch; and

  3. Locally incorporated subsidiary

Security of foreign investments:

Legislative Protection: Several laws protect foreign investors / investments.

Bilateral Investment Treaties (BITs): Bilateral agreements on the promotion and protection of investments (46 countries) provide for the following:

  • The Contracting Parties shall encourage investments in their respective territories by investors from other Contracting Parties.

  • Non-discrimination between local investors and foreign investors.

  • Equal / non-discriminatory treatment in case of compensation for losses due to war, other armed conflicts or state of national emergency.

  • Free transfer of investments and income from them, including profits, dividends, interest income, proceeds from sale or liquidation, loan repayments, salaries, wages and other allowances, etc.

  • A dispute settlement mechanism to settle any dispute between countries regarding the interpretation of the respective agreement and a dispute settlement procedure to settle any dispute between a host country and an investor from the other country.

Source by Muzaffaruddin Alvi

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