Direct Foreign Investment (FDI)
Merger- A merger is a combination of two companies to form a new company
Acquisition - is the purchase of one company by another company in which a new company is formed.
joint-venture- is a shared ownership in a foreign business
Foreign Direct Investment (FDI) - Investment made by country A into country B over a long term period which may include
technical and technology assistance, building of infrastructure, management and policy support.
Types of FDI Incentives
• Fiscal Incentives - to reduce tax burden of foreign investors.
• Financial Incentives - grants given by the government.
•Other Incentives - like subsidized infrastructure, market preference, preferential foreign exchange rates.
Types of Foreign Direct Investment
INWARD FDI: This involves an foreign entity either investing in or purchasing the goods of a local company.
OUTWARD FDI: is where a domestic firm expands its operations to a foreign country either via acquisition or expansion of
an existing foreign facility.
Horizontal FDI: is when a company establishes the same type of business operation in a foreign country as it operates in its
home country.
Vertical: In a vertical FDI, a business acquires a complementary business in another country.
Conglomerate Investment: Here an organization invests in a foreign organization that has no similarity to its core operations.
This is usually done as a joint venture because the home organization lacks experience.
GREENFIELD INVESTMENT: Where a parent company starts a new venture in a foreign country by constructing new
operational facilities from the ground up. In addition to building new facilities, most parent companies also create new
long-term jobs in the foreign country by hiring new employees.
Brownfield Investment - where a site previously used for a "dirty" business purpose, such as a steel mill or oil refinery, is
cleaned up and used for a less polluting purpose, such as commercial office space or a residential area.
Factors affecting FDI
Access to free trade areas
Commodities
Political Stability
Size of the local market
Transport and Infrastructure
Tax rates
Wage rates
ADVANTAGES
It brings new technologies, skills, knowledge, etc.
It improves job opportunities in the country.
It improves the quality of products and services in industries.
Improves foreign exchange position of the country.
Multinational companies expand their footprints into international markets.
DISADVANTAGES
High level of political risk.
Small companies may not be able to compete with multinational companies in their sector.
Foreign companies invest more in machinery and intellectual property than in wages of the local people.
Government has less control over the functioning of such companies as they usually work as owned subsidiaries of an
overseas company.
1