A foreign direct investment (FDI) is an investment in the form of majority ownership in a business in one country by an entity headquartered in another country. Therefore, it is distinguished from foreign portfolio investment by a notion of direct control. In foreign portfolio investments, an investor simply buys shares of companies based abroad.
Broadly, foreign direct investment includes “mergers and acquisitions, construction of new facilities, reinvestment of profits from foreign operations, and intra-company lending.” In a narrow sense, foreign direct investment simply refers to the construction of new facilities, a long-term management interest (10 percent or more of the voting shares) in a company that operates in a different economy from that of the investor . FDI is the sum of equity capital, other long-term capital, and short-term capital, as shown in the balance of payments. FDI usually involves participation in management, joint ventures, transfer of technology and expertise. The FDI stock is the net cumulative FDI (ie outward FDI minus inward FDI) over a given period. Direct investment excludes investment through purchase of shares.
Who can be a Foreign Investor?
A foreign direct investor can be classified in any sector of the economy and could be any of the following:
-
An individual;
-
A group of related individuals;
-
An incorporated or unincorporated entity;
-
A public company or a private company;
-
A group of related companies;
-
A government body;
-
An estate (law), trust or other social organization; Prayed
-
Any combination of the above.
How can a Foreign Investor invest his funds?
The foreign direct investor can acquire the voting power of a company in an economy through any of the following methods:
-
By incorporating a wholly owned subsidiary or company anywhere.
-
Through the acquisition of shares in an associated company.
-
Through a merger or acquisition of an unrelated company.
-
Participate in an equity joint venture with another investor or company.
Incentives for FDI:
Incentives for foreign direct investment can take the following forms:
-
low corporate tax rates and individual income taxes
-
tax holidays
-
other types of tax concessions
-
preferential rates
-
special economic zones
-
EPZ – Export Processing Zones
-
customs warehouses
-
maquiladoras
-
financial subsidies for investment
-
free land or land grants
-
relocation and expatriation
-
infrastructure grants
-
R&D support
-
Energy
-
derogation from regulations (usually for very large projects)
-
by excluding inward investment to earn a downstream profit.
Corporate Structures:
Various corporate structures are available to establish a place of business. There are three (03) ways by which a foreign company can have its presence in the country:
-
Office link;
-
Branch office; Y
-
Locally incorporated subsidiary
Foreign Investment Security:
Legislative protection: Various laws provide protection to foreign investors/investments.
Bilateral Investment Treaties (BITs): The Bilateral Agreements for the Promotion and Protection of Investments (46 countries) provide the following:
-
The Contracting Parties shall encourage investments in their respective territories by investors from the other Contracting Parties.
-
No discrimination between local investors and foreign investors.
-
Equal/non-discriminatory treatment in case of compensation for losses due to wars, other armed conflicts or a state of national emergency.
-
Free transfer of investments and income derived from them, including profits, dividends, interest income, sales or liquidation proceeds, loan repayments, wages, salaries and other compensation, etc.
-
A dispute settlement mechanism to settle any dispute between the countries regarding the interpretation of the respective agreement and a dispute settlement procedure to settle any dispute between a host country and an investor from the other country.