What Is Direct Investment?
Direct investment is more commonly referred to as foreign direct investment (FDI). FDI refers to an investment in a foreign business enterprise designed to acquire a controlling interest in the enterprise. The direct investment provides capital funding in exchange for an equity interest without the purchase of regular shares of a company's stock.
Key Takeaways:
- Direct investment, or foreign direct investment, is designed to acquire a controlling interest in an enterprise.
- Direct investment provides capital funding in exchange for an equity interest without the purchase of regular shares of a company's stock.
- Direct investment may involve a company in one country opening its own business operations in another country.
- Direct investment can also involve acquiring control of a business's assets already operating in the foreign country.
- There are three general types of direct investment: vertical, horizontal, or conglomerate investment.
Understanding Direct Investment
The purpose of FDI is to gain an equity interest sufficient to control a company. In some instances, it involves a company in one country opening its own business operations in another country. In other cases, direct investment involves acquiring control of existing assets of a business already operating in the foreign country. A direct investment can involve gaining a majority interest in a company or a minority interest, but the interest acquired gives the investing party effective control.
Direct investment is primarily distinguished from portfolio investment, the purchase of common or preferred stock shares of a foreign company, and by the element of control that is sought.
Control can come from sources other than an investment of capital; however, control of assets such as technology is considered only a critical input. In fact, FDI is frequently not a simple monetary transfer of ownership or controlling interest but can include complementary factors, such as organizational and management systems or technology.
Foreign direct investments can be made by individuals but are more commonly made by companies wishing to establish a business presence in a foreign country.
Examples of Foreign Direct Investment
Foreign direct investment takes many forms in practice but is generally classified as either a vertical, horizontal, or conglomerate investment.
For a vertical direct investment, the investor adds foreign activities to an existing business. An example is an American auto manufacturer that establishes dealerships or acquires a parts supply business in a foreign country.
Horizontal direct investment is perhaps the most common form of direct investment. For horizontal investments, a business already existing in one country establishes the same business operations in a foreign country. A fast-food franchise based in the United States might open restaurant locations in China. Horizontal direct investment is also referred to as green-field entry into a foreign market.
For a conglomerate-type direct investment, an existing company in one country adds an unrelated business operation in a foreign country. This is a particularly challenging form of direct investment since it requires simultaneously establishing a new business and establishing it in a foreign country. An example of conglomerate direct investment might be an insurance firm opening a resort park in a foreign country.
FAQs
For a vertical direct investment, the investor adds foreign activities to an existing business. An example is an American auto manufacturer that establishes dealerships or acquires a parts supply business in a foreign country. Horizontal direct investment is perhaps the most common form of direct investment.
What is the meaning of direct investment? ›
Direct investments are investments in tangible assets or companies with the aim of financing their development in the medium or long term. Such opportunities are meant for qualified investors and are the opposite of indirect investments, which are in listed shares, equities or bonds.
What are the 4 main investment types? ›
Bonds, stocks, mutual funds and exchange-traded funds, or ETFs, are four basic types of investment options.
What is direct investment quizlet? ›
Foreign direct investment is the purchase of physical assets or a significant amount of the ownership of a company in another country to gain a measure of management control.
What is direct investing? ›
You may be able to invest directly using direct stock plans (DSP) or dividend reinvestment plans (DRIP). Here's how they work: Direct stock plans (DSP). Some companies allow you to buy or sell their stock directly through them without using a broker.
What is an example of an indirect investment? ›
Mutual funds, exchange-traded funds (ETFs), real estate investment trusts (REITs), hedge funds, and private equity funds are all examples of vehicles that is used to engage in indirect investment.
What investment makes the most money? ›
The U.S. stock market is considered to offer the highest investment returns over time. Higher returns, however, come with higher risk. Stock prices typically are more volatile than bond prices. Stock prices over shorter time periods are more volatile than stock prices over longer time periods.
What is the best investment type? ›
11 best investments right now
- Money market funds.
- Mutual funds.
- Index Funds.
- Exchange-traded funds.
- Stocks.
- Alternative investments.
- Cryptocurrencies.
- Real estate.
There are various types of investments: stocks, bonds, mutual funds, index funds, exchange-traded funds (ETFs) and options. See which ones might work for you.
Why choose direct investment? ›
FDI can foster and maintain economic growth, in both the recipient country and the country making the investment. On one hand, developing countries have encouraged FDI as a means of financing the construction of new infrastructure and the creation of jobs for their local workers.
It generally takes the form of acquiring a stake in an existing enterprise in the foreign country or starting a subsidiary to expand the operation of an existing enterprise of that country. FDI can take two different forms: Greenfield or mergers and acquisitions (M&As).
Why choose direct investing? ›
Direct investing (also known as self-directed or discount brokerage investing) can offer a wide variety of investment choices from which you can build your investment portfolio. It can give you personal control over your portfolio at lower fees than full-service brokerage/investment firms would charge.
What is the difference between direct and indirect investment? ›
While each investment vehicle has its own unique risk attributes, it generally holds true that indirect investments offer greater diversification potential, especially in the hands of wealth management professionals, while direct investments offer scope for higher returns but typically require more active involvement ...
Which of the following is not considered a direct investment? ›
An investment in a mutual fund is not considered a direct investment.
What is direct investment option? ›
The Direct Investment Option (DIO) lets you choose how your money is invested. You can buy and sell investments, track your performance and access comprehensive market research.
