A foreign direct investment (FDI) is an investment in the form of ownership control in a business in one country by an entity based in another country. Therefore, it is distinguished from foreign portfolio investment by a notion of direct control. In foreign portfolio investments, an investor simply buys shares in companies based abroad.
Broadly speaking, foreign direct investment includes “mergers and acquisitions, construction of new facilities, reinvestment of profits obtained from foreign operations, and intra-corporate loans.” In a strict sense, foreign direct investment refers simply to the construction of new facilities, a lasting management interest (10 percent or more of the voting shares) in a company that operates in an economy other than the one of the investor. FDI is the sum of equity capital, other long-term capital, and short-term capital, as shown in the balance of payments. FDI generally involves participation in management, joint ventures, technology transfer, and expertise. The volume of FDI is the net FDI (that is, the outgoing FDI minus the incoming FDI) accumulated for a given period. Direct investment excludes investment through purchase of shares.
Who can be a foreign investor?
A direct foreign investor can be classified in any sector of the economy and could be any of the following:
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An individual;
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A group of related people;
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An incorporated or unincorporated entity;
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A public company or private company;
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A group of related companies;
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A government body;
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An estate (law), trust or other social organization; gold
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Any combination of the above.
How can a foreign investor invest his funds?
The direct foreign investor can acquire voting power from a company in an economy through any of the following methods:
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Incorporating a wholly owned subsidiary or company anywhere.
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Acquiring shares in an associated company.
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Through merger or acquisition of an unrelated company.
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Participate in an equity joint venture with another investor or company.
Incentives for FDI:
Incentives for foreign direct investment can take the following forms:
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low rates of corporate taxes and personal income taxes
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tax holidays
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other types of tax concessions
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preferential rates
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special economic zones
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EPZ – Export Processing Zones
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Fiscal warehouses
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Maquiladoras
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financial subsidies for investment
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free land or land subsidies
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relocation and expatriation
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infrastructure subsidies
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R&D support
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Energy
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repeal of regulations (usually for very large projects)
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excluding internal investment to obtain a later profit.
Corporate structures:
Various corporate structures are available to establish a place of business. There are three (03) ways in which a foreign company can have a presence in the country:
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Office link;
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Branch office; and
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Locally incorporated subsidiary
Security of foreign investment:
Legislative Protection: Various laws provide protection to foreign investors / investments.
Bilateral investment treaties (BIT): Bilateral investment promotion and protection agreements (46 countries) establish the following:
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The Contracting Parties will encourage investments in their respective territories by investors from the other Contracting Parties.
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Non-discrimination between local investors and foreign investors.
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Equal or non-discriminatory treatment in the event of compensation for losses due to war, other armed conflicts, or a state of national emergency.
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Free transfer of investments and income derived from them, including profits, dividends, interest income, proceeds from sales or liquidations, loan repayments, salaries, salaries and other compensation, etc.
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A dispute resolution mechanism to resolve any dispute between the countries regarding the interpretation of the respective agreement and a dispute resolution procedure to resolve any dispute between a host country and an investor from the other country.
