Foreign direct investment, or FDI, occurs when an individual or a business entity owns a minimum of 10% capital in a foreign organization. FDI refers to the initial investment that is made to reach the 10% threshold. Any additional transactions that build a further capital stake in a foreign organization are listed as extra direct investments, or EDI.
At the 10% minimum, it is not possible to achieve a controlling interest in that foreign organization. It does give the investor a voice in the policies and procedures of that company, offering an opportunity to influence future decisions for the mutual benefit of everyone involved.
The advantage of FDI is that it allows the developed world to begin improving emerging market opportunities. The developing world can see improvements in wealth and opportunity, while the developed world can benefit from increased profits, developing relationships, and a greater level of market influence.
The disadvantage of a foreign direct investment is the risks that are involved. There is no guarantee that an investment will offer dividends in the future. The global political climate is inherently unstable as well, which means a company could lose its investment as soon as it is made should a seizure or takeover take place.
Here are some additional foreign direct investment advantages and disadvantages to take a look at today.