Full Form of FDI

Updated on April 17, 2024
Article byWallstreetmojo Team
Edited byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

What Is The Full Form of FDI?

This full form of FDI or foreign direct investment can be better understood as an investment that is made by a company or an individual belonging to one country into the shares and securities of another company that operates in a different country, and businesses that make FDI is labeled as MNCs (multinational companies) or MNEs (multinational enterprises).

Full-Form-of-FDI

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In a few instances, the foreign direct investor may also gain voting rights in the company whose assets they are investing in. A country considers investing in the firms of another company keeping into account how skilled the workforce is and what growth prospects it has.

Full Form of FDI Explained

It is an investment made by a company or an individual in a company’s financial securities that operate in a different country. It allows the companies to gain access to new markets, new technological advancements, skills, minimize production costs, boost profit margin, and whatnot. For the host country, it means the development of its overall economy. However, the volatile nature of the holding company can sometimes be a drawback too.

This plays a significant role concerning making cross border investments. This can offer an organization or individual access to newer markets, access to new and updated technologies, and whatnot. FDI can also enable an organization or an individual to learn new skills, lower production costs, maximize production, gain a competitive advantage, make more profits, get better exposure, and so on. The foreign company and host country receiving investments can also gain access to advanced technologies and new skills. They can also lay the foundation for the same to have economic development.

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Types

Typically speaking, there are just two types of foreign direct investment. However, two other types of FDI have also been observed. These types are provided with an explanation below –

foreign direct investment Types

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#1 – Horizontal Foreign Direct Investment

This company expands its national operations internationally. The company will conduct the same activities but not in its own country. It will continue the activities in a host country.

#2 – Vertical Foreign Direct Investment

In this type of foreign direct investment, a company expands its national operations internationally by opting for a varied supply chain level. This means that the company performs different activities in the host country, but all these activities remain related to the primary business.

#3 – Conglomerate Foreign Direct Investment

A company gains acquisition of an unrelated business in a host country. However, this may seem uncommon since it requires the company to overcome two barriers to gaining entry.

#4 – Platform Foreign Direct Investment

A company enters an international market, and the outputs derived from the foreign business operations are exported to another country. This is also termed an export-platform foreign direct investment.

Examples

Let us consider the following instances to understand the concept better:

Example 1

One of the most powerful ways for nations to encourage higher foreign direct investments is through trade agreements. The North Atlantic Free Trade Agreement is one of the finest examples of trade agreements. It is the largest free trade agreement in the world. North Atlantic Free Trade Agreement increased foreign direct investment between the U.S., Canada, and Mexico to a whopping 452 billion dollars in 2012.

Example 2

International Monetary Fund published a report in April 2023 where it emphasized how the rising geopolitical tensions has affected global trade. It stated that this resilience or limitation from the end of several nations is leading to fragmentation of foreign direct investment. As a result of this, the countries, especially the developed ones, are making attempts to bring production either home or to the countries they trust.

Through this, in turn, the advanced economies lead to limiting investment opportunities for many countries, thereby restricting their economic growth and progress.

Advantages

There are numerous benefits of foreign direct investment. Both multinational companies and foreign countries can reap the benefits of FDI. Sometimes, either of the two might derive benefits from foreign direct investments, and sometimes both of them together. The advantages of foreign direct investments for multinational enterprises are –

  • Access to National and International Markets – This is a perfect way for an organization or an individual to enter international markets.
  • Access to Important Resources – It can also allow an individual or an organization to access a country’s natural resources like fossil fuels and precious metals. For example, oil-selling companies often tend to make foreign direct investments in developing oil fields.
  • Lowers Production Costs – Foreign direct investments can help in lowering production costs. FDI gives companies the leverage to outsource their production work to companies operating from different countries for cost reduction. It helps in the development of upcoming industries. It also exposes the local and national governments, individuals, and entities to new business opportunities, practices, economic concepts, management techniques, and technology to help develop local entities and industries.

Disadvantages

Besides multiple benefits, making foreign direct investments also has a few demerits, which the nations must be aware of to ensure they don’t have unrealistic expectations from these FDIs.

Listed below are some of the disadvantages to have a look at:

  • Foreign direct investments can create a competitive advantage prevailing in a nation. This can adamantly lower a country’s comparative advantage if the foreign ownership of entities happens in strategically important and hypersensitive industries.
  • Investors making Foreign direct investments might not add any value to the business but might hamper its operations at the same time. Foreign investors might sell the unprofitable segments of an entity to local and low-grade investors.
  • Foreign investors can even misuse the entity’s collateral securities to obtain local loans, and that too at lower costs. It might also happen that foreign investors may not reinvest but might reissue the funds back to the holding company.
  • Profit repatriation is another drawback of foreign direct investment. FDI disallows companies from reinvesting their profits in the host country. This often results in the larger capital flowing out of the host country.

Difference between FDI and FII

Foreign Direct Investment (FDI) and Foreign Institutional Investor (FII) are two terms that are widely used in the context of foreign investments. However, they are not similar even though they might sound so.

Let us have a look at the point below to understand how they differ from each other:

FDI and FII

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  1. There is a vast difference between FDI and FII. FDI stands for foreign direct investment, while FII stands for foreign institutional investors. FDI is made by a parent entity in a host country, while a company makes FII in a foreign country’s financial markets. FDI is a long-term investment, and as a result of this, it flows only in the primary markets[.
  2. FDI is more stable as compared to FII. FII is a short-term investment, and as a result, it flows only in the secondary markets. FDI can enter and exit the stock market very easily, while entering and exiting the stock market is not easy in the case of FII.

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This has been a guide to what is the Full Form of FDI. We explain Foreign Direct Investment with its types, examples, advantages, disadvantages & vs FII. You may refer to the following articles to learn more about finance –

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