Why is FDI Important?

FDI is an important source of externally derived finance that offers countries with limited amounts of capital get finance beyond national borders from wealthier countries. For example, exports and FDI are the two key ingredients in China’s rapid economic growth.

According to the World Bank, FDI is one of the critical elements in developing the private sector in lower-income economies and thereby, in reducing poverty.

Vehicles of FDI

●      Reciprocal distribution agreements − This type of strategic alliance is found more in trade-based verticals, but in practical sense, it does represent a type of direct investment. Basically, two companies, usually within the same or affiliated industries, but from different nations, agree to become national distributors for each other’s products.

●      Joint venture and other hybrid strategic alliances − Traditional joint venture is bilateral, involving two parties who are within the same industry, partnering for getting some strategic advantage. Joint ventures and strategic alliances offer access to proprietary technology, gaining access to intellectual capital as human resources, and access to closed channels of distribution in select locations.

●      Portfolio investment − For most of the 20th century, a company’s portfolio investments were not considered a direct investment. However, two or three companies with “soft” investments in a company could try to find some mutual interests and use their shareholding for management control. This is another form of strategic alliance, sometimes called shadow alliances.

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