Foreign Direct Investment (FDI)

A foreign direct investment (FDI) is an investment in the form of majority ownership 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 of companies based abroad.

Broadly speaking, foreign direct investment includes “mergers and acquisitions, construction of new facilities, reinvestment of profits from foreign operations, and intra-company loans.” In a narrow sense, foreign direct investment simply refers to the construction of new facilities, a long-term managerial interest (10 percent or more of the voting shares) in a company that operates in a different economy from that 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 typically involves management involvement, joint ventures, transfer of technology and expertise. The stock of FDI is the net accumulated FDI (ie outgoing FDI minus incoming FDI) during a given period. Direct investment excludes investment by purchase of shares.

Who can be a Foreign Investor?

A foreign direct investor can be classified in any sector of the economy and could be any of the following:

• An individual;
• A group of related individuals;
• An incorporated or unincorporated entity;
• A public company or a private company;
• A group of related companies;
• A government body;
• An estate (law), trust or other social organization; Prayed
• Any combination of the above.

How can a Foreign Investor invest their funds?

The foreign direct investor can acquire the voting power of a company in an economy through any of the following methods:

• By incorporating a wholly owned subsidiary or company anywhere.
• Through the acquisition of shares in an associated company.
• Through a merger or acquisition of an unrelated company.
• Participate in a joint venture capital with another investor or company.

FDI incentives:

Incentives for foreign direct investment can take the following forms:

• low corporate tax rates and individual income taxes
• tax holidays
• other types of tax concessions
• preferential rates
• special economic zones
• EPZ – Export Processing Zones
• customs warehouses
• maquiladoras
• investment financial grants
• free land or land subsidy
• relocation and expatriation
• infrastructure subsidies
• R&D support
• Energy
• repeal of regulations (usually for very large projects)
• by excluding internal investment for a downstream profit.

Corporate Structures:

Various corporate structures are available to establish a place of business. There are three (03) ways, by which a foreign company can have its presence in the country:

1. Office link;
2. Branch office; Y
3. Locally incorporated subsidiary

Foreign Investment Security:

Legislative protection: Various laws provide protection to foreign investors/investments.

Bilateral Investment Treaties (BITs): The Bilateral Agreements for the Promotion and Protection of Investments (46 countries) provide the following:

• The Contracting Parties shall encourage investments in their respective territories by investors from the other Contracting Parties.
• Non-discrimination between local investors and foreign investors.
• Equal/non-discriminatory treatment in case of compensation for losses due to wars, other armed conflicts or state of national emergency.
• Free transfer of investments and income derived from them, including profits, dividends, interest income, sales or liquidation proceeds, loan repayments, salaries, wages and other compensation, etc.
• A dispute settlement mechanism to settle any dispute between countries regarding the interpretation of the respective agreement and a dispute settlement procedure to settle any dispute between a host country and an investor from the other country.