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The Ten Percent Magic: Why is control so important for FDI?
With the rapid development of the global economy, foreign direct investment (FDI) has become an important part of international trade. FDI enters a country through capital, which is not only the flow of capital, but more importantly, it brings the transfer of control. Control is usually defined as the proportion of voting shares holding more than 10% of the investment object. This threshold is a gray area in reality, because equity holding less than this proportion can sometimes indirectly obtain control. This requires companies to think carefully when choosing FDI, because the acquisition of control is closely related to autonomy and investment results.
In the standard definition of FDI, the concept of control is at its core. Control is not only reflected in the proportion of shares. Technology, management advantages and even control of key resources are also key factors affecting the success or failure of FDI.
Definition and background of FDI
Foreign direct investment refers to direct investment by companies or individuals in one country into entities in another country, involving the purchase of assets such as land, buildings, and factories. In addition to mergers and acquisitions, establishing new facilities, and reinvestment, FDI also covers various forms such as cross-company loans. What is unique about FDI is that it is closely linked to substantial control owned by the investor, rather than just the acquisition of assets or shares.
The earliest research on FDI can be traced back to 1960, when Stephen Hymer proposed a new theoretical framework, which filled the gaps that previous research on foreign investment could not explain. He believes that the fundamental difference between FDI and capital investment lies in control rights, which enable companies to better manage risks and obtain returns.
Hymer believes that FDI is not only the inflow or outflow of funds, but more importantly, the acquisition of control rights, and this control rights can ensure that enterprises have greater autonomy and competitiveness in overseas business.
Types and influencing factors of FDI
Based on the perspective of investors, FDI can be divided into horizontal, vertical and diversified types. Horizontal FDI refers to a multinational enterprise extending the production chain of its domestic industry to the destination country to produce similar goods. Vertical FDI is to acquire the supply chain of the destination country or to promote products through operating local distribution channels. In addition, FDI is also affected by multiple factors such as the political and economic environment, natural resources, and labor costs of the destination country.
In the context of globalization, the impact of FDI on promoting local economic development, technology transfer and productivity improvement has become increasingly obvious. According to some studies, FDI can effectively improve the productivity and competitiveness of local enterprises, especially in developing countries, where FDI is an important economic driver.
Global FDI trends
The United States and China are the world's major FDI recipients respectively. The policies, economic environment and market capacity of these two countries have attracted a large amount of international investment. According to the report, France became Europe's largest FDI destination in 2020, mainly due to the government's various reform measures. In China, since its opening up in the late 1970s, the scale of FDI has grown rapidly and China has become one of the world's major recipients of FDI.
However, FDI liquidity among different countries is affected by multiple factors. For example, in Middle Eastern countries such as Iran, FDI has experienced huge fluctuations due to changes in the political and economic environment. This situation has forced many potential investors to reconsider risks and benefits when making international investments.
The future and challenges of FDI
With the changes in the global economy, what will be the future trend of FDI? Current trends show that digital economy and green investment will become potential new areas for FDI. Competition between countries will not be limited to traditional industries. Technological innovation, green energy and other fields will also become the new focus of FDI. Enterprises must be keenly aware of these changes and formulate corresponding investment strategies to remain competitive.
On the global economic stage, FDI is regarded as a strategic resource. How enterprises effectively utilize this resource and gain control will become the key to winning in international competition.
In this ever-changing FDI landscape, can companies grasp the magic of these ten percentages, gain control and success, and seek sustainable development in the future?
