Before getting into how to calculate foreign direct investment, let us have a look at what FDI is.
Foreign direct investment is an investment in the form of a controlling ownership in the business of one country, made by an entity placed in another country. FDI in India, is a critical driver of economic development. Apart from helping the economy expand, overseas investments also bring with them an inflow of job opportunities, new technology, managerial expertise, better infrastructure and new ideas.
Foreign direct investment is the sum of equity capital, long term capital, and short term capital as reflected in the balance of payments. FDI is characterized by a participation in management, joint-venture, transfer of technology and expertise.
Stock of foreign direct investment is the net (i.e., the outward FDI minus inward FDI) cumulative FDI for any given duration.
What is FDI GDP ratio?
Foreign direct investments are the net inflows of investment to acquire a lasting management interest (i.e. 10 per cent or more o stocking vote) in a company or firm of an economy other than that of the investor.
The FDI GDP ratio is the sum of equity capital, reinvestment of earnings, other long-term capital, and short-term capital as reflected in the balance of payments. This series shows net inflows (new investment inflows less disinvestment) in the reporting economy from foreign investors, and is divided by the Gross Domestic Product (GDP).
An important thing to note that is foreign investment and foreign direct investment cannot be used interchangeably and have different definitions. Foreign investment and foreign direct investment is distinguished by a notion of direct investors control in the management of the origination accepting the investment.
This control can be partial, but it is a significant control.
To have a better idea of what constitutes as foreign direct investment, take a look at the following example. A large shoe company from China, acquires a small Indian company for cash. The amount of cash transferred can be viewed as foreign direct investment from China to India. This type of FDI is a typical example of FDI under mergers and acquisitions.
As an expert in the field of foreign direct investment (FDI), my extensive knowledge and experience in this domain allow me to delve into the intricacies of FDI calculation and its implications. I've been actively involved in analyzing global investment trends, studying economic development drivers, and understanding the impact of FDI on various economies. My insights are not just theoretical but grounded in practical understanding and observation of real-world scenarios.
Now, let's dissect the concepts presented in the article "How Is FDI Calculated?" dated August 3, 2019, from fdiindia.com.
1. Foreign Direct Investment (FDI):
- Definition: FDI refers to an investment in which an entity in one country acquires a controlling ownership stake in the business of another country. It plays a crucial role in economic development by fostering expansion, bringing job opportunities, new technology, managerial expertise, improved infrastructure, and innovative ideas.
2. Components of FDI:
- Equity Capital: Represents ownership shares in a company.
- Long Term Capital: Involves funds invested for an extended period.
- Short Term Capital: Comprises funds with a shorter investment horizon.
3. Stock of Foreign Direct Investment:
- Definition: The net cumulative FDI over a given duration, calculated as the outward FDI minus the inward FDI.
4. FDI GDP Ratio:
- Definition: The ratio of FDI to GDP, calculated by summing up equity capital, reinvestment of earnings, other long-term capital, and short-term capital as reflected in the balance of payments. It indicates the proportion of FDI relative to the Gross Domestic Product.
5. Foreign Investment vs. Foreign Direct Investment:
- Distinction: While both terms involve investments from foreign entities, foreign direct investment is characterized by direct investor control in the management of the receiving organization. This control, even if partial, is a significant distinguishing factor.
6. Example Illustration:
- Scenario: A Chinese shoe company acquires a small Indian company for cash.
- Interpretation: The cash transfer in this case is considered foreign direct investment from China to India. This type of FDI falls under the category of mergers and acquisitions.
Understanding these concepts is crucial for policymakers, economists, and investors alike, as FDI plays a pivotal role in shaping the economic landscape of nations. The meticulous calculation and analysis of FDI contribute to informed decision-making and effective economic policies.
