Foreign direct investment (FDI) is an investment that involves controlling ownership of a business in a country by an entity based elsewhere. This is different from foreign portfolio investments because it involves direct control. Foreign portfolio investments are where an investor simply purchases shares of foreign-based businesses.
Foreign direct investment broadly refers to “mergers, acquisitions, building new infrastructures, reinvesting profits from overseas operations, and intra-company loans.” Foreign direct investment is, in a more narrow sense, the construction of a new facility or a permanent management interest (ten percent or more) in an entity that operates in an economic environment other than the one of the investor. FDI can be defined as the sum of equity capital and additional long-term capital. It also includes short-term capital. The balance of payments is what is shown. FDI typically involves participation in management, joint venture, technology transfer, and expertise. The net (i.e., stock) of FDI refers to the total FDI. Outward FDI less inward FDI is the cumulative FDI over any period. Direct investment does not include acquisition via the purchase of shares.
Who is a foreign investor?
Any sector can be considered a foreign direct investor. It could include any of the following:
A person;
A group of people who are related.
Unincorporated or incorporated entities
Public or private company
A group of related businesses;
A government agency;
A trust, estate, or other social organization;
You can combine any combination of the above.
How can a foreign investor invest his money?
Foreign direct investment can acquire voting power in an economy by any one of these methods:
You can incorporate a subsidiary or company that is wholly owned anywhere.
You can acquire shares in an affiliated enterprise.
Through a merger of two or more unrelated enterprises.
Participating in an equity partnership with another investor/enterprise
Incentives for Foreign Direct Investment
These are some examples of foreign direct investment incentives:
Low corporate and individual income taxes
Tax holidays
Other types of tax concessions
Preferential tariffs
Special economic zones
EPZ – Export Processing Zones
Bonded storage
Maquiladoras
investment financial subsidies
Free land or land subsidies
relocation & expatriation
infrastructure subsidies
R&D Support
Energie
exemption from regulations (usually for large projects)
To maximize the downstream profit, you can exclude internal investment.
Corporate Structures
There are many corporate structures that can be used to set up a business location. Three (3) ways foreign companies can have their presence in the country are available:
Liaison Office;
Branch Office
Filiales localized
Foreign Investment Security:
Legislative Protection: Several laws provide protection to foreign investors/investment.
Bilateral Investment Treaties: (BITs). Bilateral Agreements on Promotion and Protection of Investment (46 Countries) provide the following:
Investors from other Contracting Parties are encouraged to invest in their territories by the Contracting Parties.
Non-discrimination of foreign and local investors.
Equal/non-discriminatory treatment in case of compensation for losses owing to war, other armed conflicts, or a state of national emergency.
Investments are free to transfer, and income can be derived from them, including profits, dividends, and interest income. Repayments of loans, wages, and other compensation are not allowed.
A dispute settlement process to resolve any dispute between countries regarding the interpretation of their respective agreements.
