How are foreign direct investments divided?

Greenfield or brownfield and mergers and acquisitions are the two main subdivisions

by Lorenzo Ciotti
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How are foreign direct investments divided?
© Spencer Platt / Staff Getty Images News

The foreign direct investment is a form of internationalization of companies. It represents an item in the national accounts in which the transfers of capital and technologies from one country to another are indicated. Mergers and acquisitions are now 3/4 of FDI.

They are a phenomenon that mainly involves both incoming and outgoing developed countries; in fact these nations have a greater investment capacity and can offer companies that better respond to the participation targets sought.

In general, Europe is the largest recipient of every type of FDI, although in recent years there has been a strengthening of the position of developing countries. The peak of FDI occurred in 2000; in the period 1995-2005 their value doubled

But how do they distinguish themselves?

Greenfield and brownfield and mergers and acquisitions are the two main subdivisions.

The first form brings, in relation to the FDI flow, an increase in the capital stock of the country receiving the investment. The same cannot be said, at least in the initial phase of acquisition of the other, in the case of mergers and acquisitions.

For an analysis of the effects of this form of FDI on the capital stock, we will have to wait to see the development of the strategy that the investing company intends to pursue and which may be a strengthening of its position in the country or a downsizing of production capacity, solutions which, as is easy to imagine, have opposite effects on the overall endowment of resources of the host country.

A further distinction is between horizontal and vertical FDI. According to the International Monetary Fund and the OECD, an FDI occurs when the foreign investor owns at least 10% of the ordinary shares, carried out with the aim of establishing a lasting interest in the country, a long-term relationship and significant influence in the business management.

Finally, a distinction is made between active or outgoing FDI, when the domestic economy invests in foreign countries, and passive or incoming FDI in the opposite case. Since it influences the economy of each country, FDI is an important indicator for the internationalization process.

With globalization, this form of investment has seen considerable development. FDI represents an item in the national accounts in which transfers of capital and technologies from one country to another are indicated.

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