Due to FDI there is an increase in productivity, which occurs due to technology transfer or due to improved managerial, technical skills. Also, there is an unemployment reduction in the host country.
Also there is a possibility of earning foreign exchange with sale/export of FDI produced goods abroad (generally, foreign investors may help introduce and integrate the economy of the host country in to the global market place). All this leads to increase in a competitive market leading to increase in overall GDP of the nation.
The two main definitions of FDI are contained in the Balance of Payments Manual (Washington, D.C., International Monetary Fund, 1977 and 1993) and the second edition of the Detailed Benchmark Definitions of Foreign Direct Investment (Paris, Organisation for Economic Co-operation and Development, 1992 and 1996).
According to the Balance of Payments Manual, FDI refers to investment made to acquire lasting interest in enterprises operating outside of the economy of the investor. Further, in cases of FDI, the investor's purpose is to gain an effective voice in the management of the enterprise.
The foreign entity or group of associated entities that makes the investment is termed the "direct investor". The unincorporated or incorporated enterprise – a branch or subsidiary, respectively, in which direct investment is made – is referred to as a "direct investment enterprise".
Some degree of equity ownership is almost always considered to be associated with an effective voice in the management of an enterprise; in the revised edition of the Manual, IMF suggests a threshold of 10 per cent of equity ownership to qualify an investor as a foreign direct investor.
Once a direct investment enterprise has been identified, it is necessary to define which capital flows between the enterprise and entities in other economies should be classified as FDI.
Since the main feature of FDI is taken to be the lasting interest of a direct investor in an enterprise, only capital that is provided by the direct investor-either directly or through other enterprises related to the investor-should be classified as FDI.
The forms of investment by the direct investor which are classified as FDI are equity capital, the reinvestment of earnings and the provision of long- and short-term Intra-company loans (between parent and affiliate enterprises).
According to the benchmark definition of the OECD, a direct investment enterprise is an incorporated or unincorporated enterprise in which a single foreign investor either owns 10 per cent or more of the ordinary shares or voting power of an enterprise (unless it can be proved that the 10 per cent ownership does not allow the investor an effective voice in the management) or owns less than 10 per cent of the ordinary shares or voting power of an enterprise, yet still maintains an effective voice in management.
An effective voice in management only implies that direct investors are able to influence the management of an enterprise and does not imply that they have absolute control. The most important characteristic of FDI, which distinguishes it from portfolio investment, is that it is undertaken with the intention of exercising control over an enterprise.
There is a notorious lack of comparability of the FDI data of different economies. This lack of comparability usually results in discrepancies between total outflows and total inflows or between outward stocks and inward stocks. There are three main causes for the lack of comparability and discrepancies,
First, economies differ in their definitions of FDI, since most depart in one way or another from the conventions recommended by the IMF or OECD.
Second, economies differ in their methods of data collection; a principal problem is the difficulty of identifying the ultimate beneficiary as opposed to the immediate beneficiary of FDI.
Third, corporate accounting practices and valuation methods differ between economies.
Also there is a possibility of earning foreign exchange with sale/export of FDI produced goods abroad (generally, foreign investors may help introduce and integrate the economy of the host country in to the global market place). All this leads to increase in a competitive market leading to increase in overall GDP of the nation.
The two main definitions of FDI are contained in the Balance of Payments Manual (Washington, D.C., International Monetary Fund, 1977 and 1993) and the second edition of the Detailed Benchmark Definitions of Foreign Direct Investment (Paris, Organisation for Economic Co-operation and Development, 1992 and 1996).
According to the Balance of Payments Manual, FDI refers to investment made to acquire lasting interest in enterprises operating outside of the economy of the investor. Further, in cases of FDI, the investor's purpose is to gain an effective voice in the management of the enterprise.
The foreign entity or group of associated entities that makes the investment is termed the "direct investor". The unincorporated or incorporated enterprise – a branch or subsidiary, respectively, in which direct investment is made – is referred to as a "direct investment enterprise".
Some degree of equity ownership is almost always considered to be associated with an effective voice in the management of an enterprise; in the revised edition of the Manual, IMF suggests a threshold of 10 per cent of equity ownership to qualify an investor as a foreign direct investor.
Once a direct investment enterprise has been identified, it is necessary to define which capital flows between the enterprise and entities in other economies should be classified as FDI.
Since the main feature of FDI is taken to be the lasting interest of a direct investor in an enterprise, only capital that is provided by the direct investor-either directly or through other enterprises related to the investor-should be classified as FDI.
The forms of investment by the direct investor which are classified as FDI are equity capital, the reinvestment of earnings and the provision of long- and short-term Intra-company loans (between parent and affiliate enterprises).
According to the benchmark definition of the OECD, a direct investment enterprise is an incorporated or unincorporated enterprise in which a single foreign investor either owns 10 per cent or more of the ordinary shares or voting power of an enterprise (unless it can be proved that the 10 per cent ownership does not allow the investor an effective voice in the management) or owns less than 10 per cent of the ordinary shares or voting power of an enterprise, yet still maintains an effective voice in management.
An effective voice in management only implies that direct investors are able to influence the management of an enterprise and does not imply that they have absolute control. The most important characteristic of FDI, which distinguishes it from portfolio investment, is that it is undertaken with the intention of exercising control over an enterprise.
There is a notorious lack of comparability of the FDI data of different economies. This lack of comparability usually results in discrepancies between total outflows and total inflows or between outward stocks and inward stocks. There are three main causes for the lack of comparability and discrepancies,
First, economies differ in their definitions of FDI, since most depart in one way or another from the conventions recommended by the IMF or OECD.
Second, economies differ in their methods of data collection; a principal problem is the difficulty of identifying the ultimate beneficiary as opposed to the immediate beneficiary of FDI.
Third, corporate accounting practices and valuation methods differ between economies.