What Are Foreign Direct Investments? A Foreign Direct investment is a scenario whereby a company or an organization invests in another country. A Foreign Direct Investment is a type of inward investment. FDIs deal with foreign or external entities, with most transactions involving the purchase and supply of goods from external economies or businesses.
How Does a Business Make a Foreign Direct Investment?
You may be wondering about how businesses make Foreign Direct Investments. Businesses have several ways of gaining control by investing in FDIs. The most common methods include:
- Starting a console or a subsidiary company in a foreign country.
- Obtaining and controlling a preexisting company in a foreign country
- Starting a joint venture with a company in a foreign country
- Merging with an international company.
How Many Types of FDIs Do We Have?
FDIs occur in three different manners. These are:
- Horizontal – Horizontal foreign direct investments occur when a company’s investment in a foreign country is directly related to the activities the company conducts at home.
- Vertical–In this FDI type, a company uses the FDI investment as a way of adding new stages of the company’s activities abroad. Vertical FDIs are divided into:
o Forward vertical FDIs- This is where a company initiates steps to grow its customer base, e.g., by acquiring a distributor abroad.
o Backward vertical FDIs- In backward FDI, a company uses international integration to obtain raw materials, e.g., by purchasing a plantation in a foreign country.
- Conglomerate – This is when a company invests in a controlling stake in a different type of business abroad. This type of FDI is uncommon since most companies find it hard to start a new industry in a new country.
How can Businesses Profit from FDIs?
Companies can benefit from FDIs in four ways. These are:
- Accessing new markets
This is the most obvious way a business can profit from FDIs. As a company invests in a business or starts operations in a foreign country, it expands its customer base, thus growing the business.
- Accessing resources
Investing in FDIs helps foreign companies access resources, which boosts their profits. It also helps a company to gain access to resources, new technologies, cooperation opportunities, and management skills. All of these will not only make the company save money, but also make more profit.
- Lowers production costs.
Investing in FDIs reduces production costs, which also boosts profits. By gaining access to raw materials, a company can start producing the same products at cheaper costs compared to when it had to purchase the raw materials.
- Gaining tax benefits
Companies also benefit from FDIs by taxation and how their profits are taxed abroad and at home. The company may enjoy more profits from the income generated from a foreign country because the foreign country has lower tax rates than the home country.
Foreign direct investments have increased in recent years. The practice can be profitable for any business if the business owners are aware of all the regulations and risks that surround the practice. After doing an analysis of the risks and the profit margins, they can begin to strategically plan on how, when, and where to make the investments. If they manage to get these factors right, they’ll definitely enjoy a boost in profits.