Foreign direct investment - FDI

Updated: 2006-10-17 15:11

Foreign direct investment (FDI) is defined as a long-term investment by a foreign direct investor in an enterprise resident in an economy other than that in which the foreign direct investor is based. The FDI relationship, consists of a parent enterprise and a foreign affiliate which together form a transnational corporation (TNC).

In order to qualify as FDI the investment must afford the parent enterprise control over its foreign affiliate. The United Nations defines control in this case as owning 10 percent or more of the ordinary shares or voting power of an incorporated firm or its equivalent for an unincorporated firm.

In the years after the Second World War global FDI was dominated by the United States, as much of the world recovered from the destruction wrought by the conflict. The US accounted for around three-quarters of new FDI (including reinvested profits) between 1945 and 1960. Since that time FDI has spread to become a truly global phenomenon, no longer the exclusive preserve of OECD countries. FDI has grown in importance in the global economy with FDI stocks now constituting over 20 percent of global GDP.

In the last few years, the emerging market countries such as China and India have become the most favoured destinations for FDI and investor confidence in these countries has soared. As per the FDI Confidence Index compiled by A.T. Kearney for 2005, China and India hold the first and second position respectively, whereas United States has slipped to the third position.

In the first four months of 2006, China saw an FDI of 18.48 billion US dollars, up 5.76 percent over the same period last year, the Xinhua News Agency reported citing sources with the Ministry of Commerce. In the first four months, 12,639 foreign firms were authorized to be established in China, down 3.46 percent from the same periodof last year. Hong Kong was ranked first with its investment totaling 5.36 billion US dollars. Japan and the United States, listed the third and the sixth respectively, have posted investments in China of 1.552 billion and 837 million US dollars.

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