December 16, 2019
In practice, “FDI” is any type of international economic activity that a location wishes to attract.
On the face of it, the definition of foreign direct investment (FDI) is quite straight forward. According to UNCTAD, which publishes the most widely used FDI statistics, “FDI is defined as an investment reflecting a lasting interest and control by a foreign direct investor, resident in one economy, in an enterprise resident in another economy”.
Formal definitions of FDI such as this usually classify “lasting interest and control” as representing 10 percent of voting shares of an entity. In other words, the formal definition of FDI includes any type of investment where a foreign company takes more than a 10 percent ownership stake in an entity in another country, which can take place through an acquisition, joint venture or by establishing a wholly owned subsidiary.
While the formal definition of FDI is important for statistical purposes, the practical definition of FDI for the investment promotion agencies (IPAs) that are trying to attract it can be very different, depending on the agencies’ focus and priorities.
Traditionally, IPAs have pursued “greenfield” or “productive” investment, meaning companies that establish a new physical presence in their location that leads to the creation of new employment. Attracting this type of investment remains the main goal of most IPAs and is typically what agencies refer to when they talk about FDI.
Many IPAs around the world are also focused on infrastructure investment, which includes financial investment into the construction of roads, airports, railways and other physical infrastructure.
In recent years, the definition of FDI has become increasingly broad as agencies expand the scope of their activities to reflect changes in their structure and objectives as well as the transformation of industries through technology.
Many IPAs are actively trying to attract financial investment into return-generating assets (such as real estate) by sovereign wealth funds, pension funds or even high net worth individuals. A growing number of agencies are seeking to attract venture capital investment into domestic funds or directly into start-ups. The definition of FDI now increasingly includes activities that do not actually involve any direct investments at all, such as research partnerships between foreign companies and local institutions, or projects to test and pilot new technologies.
These are just some examples of the different types of investment that IPAs are seeking to attract. While many agencies still have a narrow focus on greenfield investment, an increasing number are now pursuing a much wider range of investment than in the past.
Not all these forms of foreign investment conform to the formal definition of FDI. Although they might therefore not be counted as FDI in official statistics, these other types of investment are just as important for the locations trying to attract them. If they contribute to a location’s economic development objectives and the agency has been given the task of attracting them, then they represent “FDI” for that location and IPA, regardless of whether they meet the formal definition of FDI.
The broadening definition of FDI may increase opportunities for investment attraction but also creates challenges for agencies. IPAs need a much wider range of skills and know-how to approach these different types of investment. They also need to develop new services, since the “classical” support provided by IPAs for greenfield investors may be less valuable for other types of investors. Finally, typical performance indicators based on employment and capital expenditure often do not capture the value of other types of FDI, which may generate other benefits that cannot be measured in terms of jobs or investment figures.
