Methods & Types of Foreign Direct Investment (FDI)

The foreign direct investor may acquire 10% or more of the voting power of an enterprise in an economy through any of the following methods :
1. By incorporating a wholly owned subsidiary or company
2. By acquiring shareowners an associated enterprise
3. Through a merger or an acquisition of an unrelated enterprise
4. Participating in an equity joint venture with another investor or enterprise foreign direct investment incentives may take the following forms : low corporate tax and income tax rates
5. Tax holidays
6. Other types of tax concession
7. Preferential tariffs
8. Special economic zones
9. Investment financial subsidies
10. Soft loan or loan guarantees
11. Free land or land subsidies
12. Relocation & expatriation subsidies
13. Job training and employment subsidies
14. Infrastructure subsidies
15. R & D support derogation from regulations (usually for very large project)

Types of Foreign Direct Investment:

Foreign Direct Investment can be broadly classified into two types : Outward FDIs and Inward FDIs. This classification is based on the types of restrictions imposed and various prerequisites required for these investments. An outward bound FDI is backed by the government against all types of associated risks. This form of FDI is subject to tax incentives as well as disincentives of various forms. Risk coverage provided to the domestic industries and subsidies granted to the local firms stand in the way of outward FDIs, which are also known as direct investment abroad.
Different economic factors encourages inward FDIs. These include interest loan, tax breaks, grants, subsidies and the removal of restrictions and limitations. Factors detrimental to the growth of FDIs include necessities of differential performance and limitations related with ownership patterns.
Other categorisations of FDI exist as well.
Vertical Foreign Direct Investment takes place when a multinational corporations owns some shares of a foreign enterprise, which supplies input for it or used the output produced by the MNC.
Horizontal Foreign Direct Investment happens when a multinational company carries out a similar business operation in different nations.
Foreign Direct Investment is guided by different motives. FDIs that are undertaken to strengthen the existing market structure or explore the opportunities of new market can be called market seeking FDIs. Resource seeking FDIs are aimed at factors of production which have more operational efficiency than those available in the home country of the investors.
Some Foreign Direct Investment involves the transfer of strategic asset. FDI activities may also be carried out to ensure optimisation of available opportunities and economies of scale. In this case, the foreign direct investment is termed as ‘efficiency seeking’.

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