Unit
- Foreign direct investment defined: FDI occurs when an investor based in one country acquires a lasting interest in, and a measure of control over, an enterprise located in another country, typically evidenced by ownership of ten percent or more of voting shares or equivalent influence over management decisions.
- Distinction from portfolio investment: Unlike portfolio investment, which involves passive purchases of stocks or bonds with no managerial involvement, FDI carries an intent to influence operations, transfer technology, or integrate the target into a broader corporate strategy, which is why it draws closer regulatory scrutiny.
- Motives for outward investment: Firms pursue FDI to access new consumer markets, secure raw materials, reduce production costs through lower labor or input prices, diversify currency exposure, or preempt competitors from establishing a foothold in a strategic region.
- Horizontal versus vertical FDI: Horizontal FDI replicates the same business activity in a new country to serve local demand directly, while vertical FDI extends a firm supply chain by locating upstream or downstream operations abroad, such as raw material extraction or final assembly.
- Role of the investment consultant: Consultants translate a client strategic intent into an actionable entry plan, coordinating legal, tax, financial, and political risk specialists while serving as the client primary point of accountability throughout the transaction lifecycle.
- Consultant as risk translator: A core function involves converting abstract regulatory or political risk into quantifiable business terms that executive committees and boards can weigh against expected returns, bridging the gap between technical compliance detail and strategic decision-making.
- Value chain positioning: Consultants typically engage at three stages: pre-investment feasibility and screening, transaction structuring and negotiation, and post-investment monitoring and government relations, with fee structures often differing across each phase.
- Global FDI patterns: Capital flows tend to concentrate in economies offering large consumer bases, stable institutions, or specialized labor pools, though emerging markets increasingly attract investment seeking higher growth rates despite elevated risk profiles.
- Client typology: Clients range from multinational manufacturing corporations seeking production efficiency to mid-size technology firms pursuing new user markets, each requiring a distinct advisory approach calibrated to their risk tolerance and internal expertise.
Strategic Framework
Framework: OLI Paradigm (Ownership, Location, Internalization)
Purpose: Explains why and where firms choose to invest abroad rather than export or license.
- Ownership advantage: The firm possesses a unique asset, such as a patented technology or brand recognition, that can be exploited profitably in a foreign market.
- Location advantage: The host country offers favorable conditions, including lower costs, resource access, or market proximity, that make local production more attractive than exporting.
- Internalization advantage: Retaining the activity within the firm through direct ownership proves more efficient than licensing the advantage to an independent local partner.
Quick Revision
- FDI involves lasting interest and control, distinguishing it from passive portfolio investment.
- Horizontal FDI replicates operations abroad while vertical FDI extends the supply chain.
- Consultants operate across feasibility, structuring, and post-investment monitoring phases.
- The OLI Paradigm explains investment decisions through ownership, location, and internalization advantages.