Fdi Theory Evidence and Practice
Foreign Direct Investment
Theory, Evidence and Practice
Imad A. Moosa
1 Introduction and Overview
WHAT IS FOREIGN DIRECT INVESTMENT? Foreign direct investment (FDI) is the process whereby residents of one country (the source country) acquire ownership of assets for the purpose of controlling the production, distribution and other activities of a firm in another country (the host country).1 The International Monetary Fund 's Balance of Payments Manual defines FDI as `an investment that is made to acquire a lasting interest in an enterprise operating in an economy other than that of the investor, the investor 's purpose being to have an effective voice in the management of the enterprise '. The United Nations 1999 World Investment Report (UNCTAD, 1999) defines FDI as `an investment involving a longterm relationship and reflecting a lasting interest and control of a resident entity in one economy (foreign direct investor or parent enterprise) in an enterprise resident in an economy other than that of the foreign direct investor (FDI enterprise, affiliate enterprise or foreign affiliate) '.2 The term `long-term ' is used in the last definition in order to distinguish FDI from portfolio investment, the latter characterized by being short-term in nature and involving a high turnover of securities.3 The common feature of these definitions lies in terms like `control ' and `controlling interest ', which represent the most important feature that distinguishes FDI from portfolio investment, since a portfolio investor does not seek control or lasting interest. There is no agreement, however, on what constitutes a controlling interest, but most commonly a minimum of 10 per cent shareholding is regarded as allowing the foreign firm to exert a significant influence (potentially or actually exercised) over the key policies of the underlying project. For example, the US Department of Commerce regards a foreign business enterprise as a US foreign `affiliate ' if a single US
Theory, Evidence and Practice
Imad A. Moosa
1 Introduction and Overview
WHAT IS FOREIGN DIRECT INVESTMENT? Foreign direct investment (FDI) is the process whereby residents of one country (the source country) acquire ownership of assets for the purpose of controlling the production, distribution and other activities of a firm in another country (the host country).1 The International Monetary Fund 's Balance of Payments Manual defines FDI as `an investment that is made to acquire a lasting interest in an enterprise operating in an economy other than that of the investor, the investor 's purpose being to have an effective voice in the management of the enterprise '. The United Nations 1999 World Investment Report (UNCTAD, 1999) defines FDI as `an investment involving a longterm relationship and reflecting a lasting interest and control of a resident entity in one economy (foreign direct investor or parent enterprise) in an enterprise resident in an economy other than that of the foreign direct investor (FDI enterprise, affiliate enterprise or foreign affiliate) '.2 The term `long-term ' is used in the last definition in order to distinguish FDI from portfolio investment, the latter characterized by being short-term in nature and involving a high turnover of securities.3 The common feature of these definitions lies in terms like `control ' and `controlling interest ', which represent the most important feature that distinguishes FDI from portfolio investment, since a portfolio investor does not seek control or lasting interest. There is no agreement, however, on what constitutes a controlling interest, but most commonly a minimum of 10 per cent shareholding is regarded as allowing the foreign firm to exert a significant influence (potentially or actually exercised) over the key policies of the underlying project. For example, the US Department of Commerce regards a foreign business enterprise as a US foreign `affiliate ' if a single US
Links: Chuang and Lin (1999) Elahee and Pagan (1999) De Andrade-Castro and Teixeira (1999) 101 FDI and technology Heinrich and Konan (2000) Stone and Jeon (2000) Mucchielli et al Impact of PTAs on horizontal FDI Relationship between FDI and trade in Asia-Pacific economies Relationship between intra- or inter-firm trade and FDI Castilho and Zignago (2000) Ellingsen and Warneryd (1999) Relationship between FDI, trade and regional integration FDI and protectionism Wilamoski and Tinkler (1999) Gopinath et al