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Foreign direct investment (FDI) is a direct investment into production or business in a country by an

individual or company of another country, either by buying a company in the target country or by
expanding operations of an existing business in that country. Foreign direct investment is in contrast
to portfolio investment which is a passive investment in the securities of another country such
as stocks and bonds.
Types
1. Horizontal FDI arises when a firm duplicates its home country-based activities at the same value
chain stage in a host country through F!.
"#$
%. Platform FDI Foreign direct investment from a source country into a destination country for the
purpose of exporting to a third country.
&. Vertical FDI takes place when a firm through F! moves upstream or downstream in different
value chains i.e., when firms perform value-adding activities stage by stage in a vertical fashion in a
host country
Evaluation of Foreign Investment Proposal
'efore evaluation, let(s revise the basics and meaning of Foreign !nvestment.
1. !nvestment is a thing, which is worth buying because it is profitable or useful in the near future.
%. Proposal is an offer and ) or invitation to do some business or trade.
&. Statutory compliance are well-specified and documented obligations (duties and
responsibilities) that are mandatory (compulsory by law) to be satisfied either by an individual or by
an organisation that too in accordance (as per guidelines) with prevailing statutes (laws) and ) or
regulations of a governed *urisdiction (area, state, country, etc.).
#. Host country is a country in whose economy foreign funds are invested.
+. Foreign investment is that investment, which is made in any country other than the home or
native country. !n other words, investments which are made outside the *urisdiction of the home
country are called foreign investments.
,he currency used for foreign investment is the currency of the host country.
'efore investing abroad, all the statutory compliance of the host country must be satisfied as they are
mandatory by its inland laws.
-rticle and !mage .redits / 0oon 1odrigue2.
,he main ISSUES that must be considered and pre-evaluated before making any foreign investment
proposal to a host country is clarified and briefly explained as follows3-
1 Economic Sta!ility
,he economic stability of the pro*ect is very important as it is directly related to the financial support
of the pro*ect. ,he economic stability of the host country is very essential as it has a direct relationship
with the foreign exchange earnings represented in the form of foreign inward and outward remittance
(transfer or payment of money). ,he economic stability of a host country can be further classified with
reference to3
1. E"c#ange $ate3 ,he exchange rate of the host country is a very crucial factor for evaluating the
foreign investment proposal. - highly fluctuating exchange rate of the host country is generally
considered riskier because it may result in a huge financial loss to the pro*ect.
%. Inflation3 ,he host country with a higher inflation rate shall not be considered for foreign
investment proposal. !nflation reduces the purchasing power of the money. 4ometimes, inflation may
also cause erosion of funds invested. Furthermore, inflation not only affects the capital invested but
will also result in a reduction in the profit margin, which overall effects the growth and expansion of
the foreign company.
% Political Sta!ility
5hen an organisation is doing business in overseas countries, then the political stability in those host
countries is of apex importance.
-ny uncertain twist to the political scenario or environment of a host country may bring sudden
unexpected changes in the administrative strategies and setup of that country. 4uch changes may or
may not be favourable to satisfy the motives of foreign investment. 6ence, a pre-systematic evaluation
and ) or research in the context of host country(s political history and its current political stability is
e7ually important.
8ormally, following are some common incidents, which have been reported as a result or due to
impact of political instability in the host country.
1. !ssue of &irculars to discontinue the pro*ect that may lead to the sei2ure of property without
paying an appropriate compensation.
%. ,he other way of interferences in the business operations can be levied by exchange control
regulations. ,his may block the flow of pro*ect(s funds.
&. 1estrictions on employment of foreign managerial or technical personnel. ,his can hinder the
7uality and performance of the pro*ect.
#. 1estrictions on import or export of goods and services.
+. 1egulations re7uiring ma*ority ownership vetting with the host country.
' Ta"ation of Income
,he host country levies taxes on income earned in their country by foreign organisations and ) or
companies.
,he rates of taxes on income differ from one host country to another. !n a ma*ority of cases, the taxes
levied on a domestic (indigenous or native) company of the host country is generally less than the
taxes levied on a foreign company operating in that host country.
Foreign companies or organisations while deciding to expand themselves over new geographical areas
or frontiers must consider and study some of the common policies adopted by various host countries.
6ere, the important points to be considered are as follows3
1. 9nderstand the definition of T()(*+E I,&-.E as it differs from one host country to another.
%. 0any host countries give priority to indirect taxes such as excise duty, custom duty, service tax,
:-, or value-added tax, etc., over the income tax (direct tax). ,he increase in an indirect tax will
result in an increase in cost of production.
&. 4ome host countries allow tax exemptions for foreign investments made in the certain categories
of the pro*ects.
#. 1eference to ouble ,axation -voidance -greement (DT(() is a must. ,-- are taxation
treaties entered into with different host countries.
+. ,ax haven countries levy low taxes or sometimes 2ero corporate tax to attract foreign investments
in mainland and boost their economy.
&onclusion on Foreign Investment
Foreign investments give better growth, profit and li7uidity for the funds invested. ,herefore, these
investments need to be evaluated carefully. !f the foreign investment proposal is evaluated properly in
accordance with the parameters (issues) discussed above, then it will not only enhance the profitability
of the pro*ect but will also eliminate the unexpected financial risk associated with the pro*ect.
Furthermore, these are *ust important minimal (here, common) parameters re7uired to be considered in
any type of foreign investment proposal.