What are the Characteristics of Foreign Direct Investment?


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FOREIGN DIRECT INVESTMENT (FDI) :
Foreign Direct Investment can be described as investment made by a foreign entity in the
equity of a domestic company (Target Company) with the intention of participating in the
management of the enterprise. Alternatively it can be described as an investment
transaction in which an investor from one country (home country) seeks to obtain
managerial interest in an entity in another country (host country) for controlling and
operating physical assets created through such investments.
Characteristics of FDI :
1. In all such transactions there is a basic intention to participate in the management of
the target company.
2. In most cases it involves a long term commitment, that is, there is no intention to
seek quick capital gains.
3. By convention an investment is considered as FDI when it involves acquisition of a
minimum of 10% of the paid up equity of the target company.
4. Generally all such investments are accompanied by technology transfers and access
to newer markets therefore the partnership involves access to raw materials for the
foreign entity and access to technology for the target company.
5. Such investments involve creation of physical assets which generally increase the
productive capacity of the target company. This generates employment and
consequently economic growth in the host country.
6. Investment by the foreign entity may involve fresh issue of capital or sale of shares
held by promoters in the target company. Therefore such transactions are essentially
primary market operations. In most cases there would be an effect on the balance
sheet of the company.

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