Foreign Direct Investment (FDI) is an investment that is made to acquire a lasting interest in an enterprise operating in an economic other than that of the investor. In addition foreign direct investment (FDI) refers to long term participation by country A into country B. It usually involves participation in management, joint-venture, transfer of technology and “know-how”. FDI has many forms and theses can be categorized depending on the investors perspective and host country’s perspective.
Investor’s perspective Controlling a foreign investment is such a big concern for an investor investing huge amounts of capital in a foreign market where it cannot be certain of success. The investor needs to control his resources such as patents, trademarks, management know-how, which when transferred can be used to determine the competitiveness position of the original holder. Horizontal Vs Vertical FDI Horizontal FDI takes place when a firm invests in the same industry as it has been operating in at home.
This would be for example a soft drink company in UK investing in Uganda in the making of soft drinks like Pepsi. Vertical FDI is divided into Forward and Backward FDI. Forward Vertical; takes place when a firm invests in facilities that will consume the output of the mother company in the home country. Different economic factors encourage inward FDIs. These include interest loans, tax breaks, grants, subsidies, and the removal of restrictions and limitations. This is usually done in search for markets .
Usually the company invests in distribution and market facilities that absorb and market the products of the company in Uganda . Backward Vertical FDI is the kind of FDI where a company invests in facilities that provide inputs or raw materials to the parent company. Most FDIs in the less developing countries such as Uganda are backward investments. They provide inputs for the firms industry in foreign country. Typical examples are Extraction investments in the mining industry.
Host country perspective Governments always endeavor to control FDI because they feel that national interests of the host country may not well be served by the decision of a foreign investor. For example; the government of Uganda regulates the number of foreign staff that companies like MTN, Zain have to employ otherwise positions could be given to foreign employees. The concern of Government of Uganda would be to ensure investments create jobs for the local populace.
The government might also need to control the level of profits repatriated or else it could cause a BOP problem. Import substitution FDIs. these are companies that are established to produce goods that have been previously imported for example Bidcos oil for cooking. Export promotion FDI. These are established to enhance and promote exportation of products to the international market, Government initiated FDIs these are established by governments to spur economic growth and development for instance the Tri-Star project between the government of Uganda and USA
Greed-field investment: establishing a wholly new operation in a foreign country. The majority of investments is in the form of mergers &acquisitions: Represents about 77%of all flows in developing countries and represent about 33%of all flows in less developing countries. Fewer target firms. The preference for mergers &acquisitions is because it becomes quicker to execute. And foreign firms have valuable strategic assets which increase the efficiency FDIs inform of Joint ventures
An equity joint venture is established according to the Law on Joint Ventures Using Ugandan and Foreign Investment Both profits and risks are distributed between the foreign partner and Ugandan partner according to the share of capital they contribute to the joint venture. Foreign contribution usually takes t form of “machinery and equipment, technology, cash (in convertible currencies), industrial property rights, and managerial experience”, and the Ugandan partner provides “land, factory buildings and facilities, raw materials, and cash in local currency”.
A contractual joint venture, which involves no equity stake, does not necessarily lead to the creation of a new legal entity. A third party can be appointed by the foreign partner and the Ugandan partner to manage the venture, or the foreign partner can entrust the Ugandan partner to manage the venture. Profits and risks are distributed between the two partners not according to capital contribution, but predetermined by the terms and conditions laid down in the venture agreement