Foreign direct investment (FDI) is a strategic corporate investment in a company based in another country. It gives the investor control or significant influence over the management of the foreign company (typically 10 percent or more of voting stock).
As described in the Blueprint for Implementation of CFO Principle 1, FDI can be a critical source of financing for SDG solutions in emerging markets and less-developed countries, whenother forms of capital are not available.
When it contributes to the SDGs, FDI should be recognizedand monitored as a separate type of SDG investment. This will help highlight its unique contribution to SDG financing and attract financing from traditional investors, as well as impact investors and development finance institutions (DFIs).
Categories of FDI
There are multiple types of foreign direct investments: FDI can be done through the construction of new facilities (greenfield investing) or via M&A involving local companies (brownfield investing). Overall, M&A represents half of all FDI; however, greenfield investments are more prevalent in emerging markets.
FDI can also be categorized by the value chain of the investing companies:
- Horizontal FDI consists of establishing abroad an affiliate in a firm’s primary industry to serve customers in the foreign market.
- Vertical FDI involves establishing a foreign affiliate that produces inputs to or intermediate services associated with a final product.
- Complex FDI combines features of both horizontal and vertical FDI.
Lastly, FDI can be differentiated by type of investment:
- Real FDI denotes investment by a company in the real economy.
- Financial FDI is an investment by a bank or a financial institution that sets up branches or subsidiaries to provide financial services abroad.
