What Is the Meaning of Direct Foreign Investment?

Direct foreign investment is a global phenomena.
Direct foreign investment is a global phenomena. (Image: global warming image by Brian Tomlinson from <a href='http://www.fotolia.com'>Fotolia.com</a>)

Direct foreign investment, also known as foreign direct investment, is a type of investment in which the company being invested in is located in a different country than the investor. For example, a Chinese company purchasing an automobile company located in Detroit would be an example of foreign direct investment.


Investors will often seek to purchase or place significant investments in companies outside their own country of origin. However, direct foreign investment is typically defined as when an investor purchases specific kinds of infrastructure in a country, such as buildings, machinery and equipment. Making a portfolio investment, such as the purchase of a foreign company's stocks and bonds, is considered an indirect foreign investment.


According to the website Economy Watch, there are two main types of direct foreign investment, based on the types of restrictions: inward and outward. Outward-bound investments are backed by the government of the company being invested in. They will typically encourage this investment through tax incentives. By contrast, inward foreign direct investments are encouraged through low-interest loans, grants, subsidies and the removal of restrictions and limitations.


While the advantages of foreign direct investment for the investing company are clear -- the potential for profits -- the U.S. Chamber of Commerce lists a number of ways in which this investment can help the host country as well. This include the creation of new jobs; the boosting of wages; and increase in exports; a strengthening of the manufacturing and services sectors; the importation of new research, technology and talents; and a contribution to the country's total productivity.


According to Citibank, proponents of foreign direct investment benefits both the country from which the investment originates and the host country, while opponents claim this type of investment allows multinational conglomerates to drive out local competition. Citibank argues that the truth lies in the middle of these two positions. While large companies have traditionally dominated foreign direct investment, they can also provide smaller, local companies with a chance to enter the international market. And, with globalization, the playing field between smaller and larger companies is being leveled, allowing more equal competition.


According to the University of California, Santa Cruz, foreign direct investment has grown dramatically in recent decades. As of 2000, more than $500 billion was invested in this form, a several-fold increase over several decades before. This portends a future in which more and more investors decide to buy infrastructure abroad.

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