What is Direct foreign investment?

What is Direct foreign investment?

Foreign direct investment (FDI) is an undertaking by a company or person from one country of investment activities in another country. Foreign direct investment is realized when an investor does business or obtains commercial assets in another country. Foreign direct investment differs from investment in portfolio investments, in which the investor buys equity in already existing foreign companies.

 

Key concepts

  •  Foreign direct investment is the investment of a company in a country other than its home country.

  •  FDI is more active in open markets than in closed markets to investors.

  •  Horizontal foreign investment is the establishment of the same type of activity in another country.

  •  Vertical foreign investment is the establishment of a different activity related to the main activity.

  •  A conglomerate foreign investment is the creation of a different activity not related to the main activity.

  •  The Bureau of Economic Analysis keeps track of foreign direct investment in the United States.

  •  Apple's investment in China is a model of FDI.

How does FDI work?

Foreign direct investment is usually active in open economies, which offer skilled workforce and prospects for growth above the average, in contrast to heavily governed economies.

The foreign direct investment includes more than capital and includes administrative and technical support. The primary characteristic of this investment is an effective direction or at least a real influence on decision-making in foreign economic activities.

 

The US Economic Analysis Office monitors foreign investment in American markets and has announced that foreign direct investment in the American business sector amounted to about $ 253.6 billion in 2018. The chemical industry represents the top of the hierarchy of foreign direct investment of $ 109 billion in the same year.

 

Special considerations

Foreign direct investment has various forms, such as opening subsidiary companies, associate companies in foreign countries, acquiring an existing foreign company, merging with a foreign company, or establishing joint ventures with those companies.

 

Initially, the investor creates a percentage of the vote within the foreign company, not less than 10% of the company’s ownership, according to the OECD guidelines. However, this definition is flexible, as there were cases of influential voting percentages within companies that were less than 10% of the voting shares.

 

Types of foreign direct investment

1- Horizontal investment:

In a foreign country, the investor establishes activities similar to those in his home country, such as a US cell phone company that opens a factory in China.

2- Vertical investment:

Create a different activity but linked to the main activity of the investor in his home country. Such as the acquisition by a company of a foreign company providing it with spare parts or raw materials necessary for its main activity.

3- Mixed investment:

Is the establishment of a company or an investor that does not have anything to do with the main activity in his home country, as the investor enters a new field with no previous experience in it, usually in the form of participation with foreign companies already working in these new areas on the investor

 An example of foreign direct investment

Examples of foreign direct investment include mergers and acquisitions, retail sales, services, logistics and supply (logistics or industrial services), among other activities. Foreign direct investment and its regulatory laws are pivotal points in corporate growth strategies.

For example, in 2017 the American company Apple announced $ 507.1 billion in investments to develop its research and activity in China, which is Apple's third-largest market outside the Americas and Europe. 

This investment announcement, announced by Tim Cook, CEO of Apple Company, pushed the Chinese markets to rise, despite the decline in Apple revenues in China by 12% in the previous quarter of the announcement, but after this announcement, foreign direct investment poured into the Chinese economy and targeted the technology sector. It increased from 11.1% to 20.4% in the first half of 2017, according to the Chinese Ministry of Commerce.

The new laws in India also allowed 100% foreign direct investment in retail, which allowed Apple to open stores in India, thereby making its products available for sale in the markets, while previously only available via the Internet.

 

Positive economy 

Positive economics is the objective analysis of what has happened and is still happening within the scope of a specific economy, and economists use it in their research to build sound foundations for their future expectations, unlike the study of normative economic in which future expectations are based on value judgments rather than facts.

 

The concept of positive economics

The basis of the scientific application of positive economics is looking at behavioral finance (a study that explains the effect of the psychological factor on the behavior of investors, when their choice is rational, and the subsequent effects on markets), economic relations based on facts, and the importance of knowing the causes and consequences; To develop economic theories.

 

Behavioral economics follows a hypothesis based on the psychological factor of the consumer, and what drives it to rational financial choices based on the information around it, and we can express the positive economy as an analytic study of facts and ideas based on facts, while normative economics is the study that determines what is the best position of the economy Or the situation it should be.

Quick info

  •  Positive economy data is tested, supported by statistics.

  •  Standard economy data consist of value judgments.

  •  Positive economics and normative economics are used together when developing policies.

Test positive economic theories

Conclusions from the positive economic analysis can test and validate its data, for example, we can predict consumer savings if the interest rate rises, based on previous experiences of the consumer’s reaction to this situation, the analysis is objective in nature, in contrast to data and normative theories that represent personal opinions. Most of the information provided by the media include a mixture of positive and normative economics assumptions. 

Positive economic theories do not provide any advice or instructions, for example, the theory assumes that one of the causes of inflation is the state printing more money, and it supports this with facts and an analysis of the behavioral relationships between inflation and increasing the money supply, but it does not oblige you to follow a specific policy regarding inflation and printing money.

Theories of positive and normative economics together provide a clear view of public policies. Because it includes facts and takes into account analyses based on personal perspectives. It is preferable to understand the basics of positive economics regarding behavioral financing and attention to the causes of events, taking into account the normative economy and its value judgments when making political decisions.

An example of positive economics from reality

Movement 15 is a national movement in the United States, which aims to raise the minimum wage to $ 15 an hour (what can be considered within the value judgments of the normative economy), participants in this movement see that $ 15 is a good minimum wage, while opponents see the opposite.

There has been a lot of research on the effect of increasing the minimum wage, but there are no conclusive conclusions about whether raising the minimum wage will affect positively or negatively, however, there are specific details within studies that can be considered examples of positive economics. 

 

The Seattle ordinance

In 2015, the city of Seattle passed a local law to gradually increase the minimum wage for city workers, so workers would get $ 15 per hour worked by 2021 and possibly before that, depending on specific job details, since that time, there have been two major studies on the impact of this. Law:

 

1. The California study

Berkeley University of California researchers focused their study on restaurant workers and found that the more the minimum wage in Seattle increased by 10%, the restaurant workers ’profit increased by 2.3%, this data is a good example of a positive economy, but their conclusion of how the minimum increase has succeeded Wages are not considered a positive economy, as there are insufficient facts for this consideration.

 

2. Washington study

While California researchers focused their studies on restaurant workers, the University of Washington researchers looked after unemployment. Researchers at Washington University did not recognize the success of increasing the minimum wage, in addition to not considering it as an example of a positive economy, and found that when increasing the minimum wage, the number of workers in the low-income bracket decreased by 1%, with the number of hours worked gradually reduced.

 

While this specific data represents a positive economy, the researchers' conclusions remain questionable. Because the study did not explain the effect of the rest of the factors, such as the effect of increasing the minimum wage on highly-paid jobs, which would of course have affected the data.

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