Net Inflows in Foreign Direct Investments

According to (World Bank, 2013) Foreign direct investments are the net inflows of investments to acquire a lasting management interest (10% or more of voting stock) in an enterprise operating in an economy other than that of the investor. It is the sum of equity capital, reinvestments of earnings, other long-term capital, and short –term capital as shown in the balance of payments. 2

This series shows net inflows (new investments inflows less disinvestments) in the reporting economy from foreign investors.

Foreign direct investment is a phenomenon resulting from globalization, which involves the integration of the domestic economic system with global markets. It is accomplished through opening up of the local economic sector as well as domestic capital for foreign investors to establish business, within the economy. Historically, technological advancement led to the emergence of better means of transport and communication. These in turn led to the movement of investors beyond political boundaries, especially during the post-colonial period (Pritchard, 1996). Even after nations acquired independence, globalization continued to influence trade between investors and foreign countries, whereby the less developed countries were supported by the developed nations to acquire materials and equipment to extract and utilize the available natural resources for economic development (Sacerdoti, 1997). However, the equipment needed the appropriate skills to ensure that less developed countries were able to utilize to their full potential. As economies expanded, trade grew and exchange of goods and services continued to advance. With the less developed economies possessing plenty of raw materials for industries abroad, foreign investment was inevitable, as industries from developed economies sought to establish in the less developed countries where raw materials were available (Sornarajah, 2004).

FDI is defined as a cross-border investment in which a resident in one economy (the direct investor) acquires a lasting interest in an enterprise in another economy (the direct investment enterprise). The lasting interest implies a long-term relationship between the direct investor and the direct investment enterprise and usually gives the direct investor an effective voice, or the potential for an effective voice, in the management of the direct investment enterprise. By convention, a direct investment is established when the direct investor has acquired 10 percent or more of the ordinary shares or voting power of an enterprise abroad (Sacerdoti, 1997).

The lasting interest in a direct investment enterprise typically involves the establishment of manufacturing facilities, bank premises, warehouses, and other permanent or long-term organizations abroad. This may involve the creation of a new establishment or investment (Greenfield investments), joint ventures, or the acquisition of an existing enterprise abroad 3 (cross-border mergers and acquisitions). The investment can be incorporated or unincorporated and includes, by convention, ownership of land and buildings by individuals (Sindre, 2011).

Direct investment comprises not only the initial transaction establishing the FDI relationship between the direct investor and the direct investment enterprise, but all subsequent transactions between them and among affiliated enterprises. Thus, the direct investment relationship extends beyond the original direct investor and includes foreign subsidiaries and affiliates of the direct investor that are part of the “parent group.” (World Bank, 2011)