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What is foreign direct investment?

It’s extremely common for investors to invest outside of their own country in order to create a diverse portfolio. That could be done by purchasing shares or bonds in a foreign company, for example. However, an alternative to owning a foreign business’s securities is outright capital investment. This is called ‘foreign direct investment’ (or FDI).

The definition of foreign direct investment is the act of acquiring a large stake in a foreign company or project. For example, a business could decide to buy a foreign company in order to expand operations to a new location.

This can be a good investment for a party that is interested in establishing a lasting interest in another country.

The benefits of FDI

Citizenship and residency advantages

In addition to the potential financial rewards that could be gained through FDI, direct investment into another country could also allow an investor to gain citizenship or residency in the country in question. This is achieved through a citizenship by investment (CBI) or residency (RBI) by investment programme, with both offering many benefits such as the ability to freely live and work elsewhere and additional rights as a citizen of another nation.

Economic integration

Foreign direct investment can help to create stable, long-lasting links between economies, which can in turn foster increased globalisation and international trade.

Growth potential

FDI investors could see significant growth if they choose to target companies or projects in developing countries with open economies and a skilled workforce.

International development

Foreign direct investment can help emerging nations to develop as the injection of capital can be used for purposes like taking advantage of new technology, creating new infrastructure, and increasing the number of jobs that need to be filled. This can help grow a country’s economy. For example, St Kitts and Nevis’ Prime Minister, Timothy Harris, explained that the quality of life has improved due to the St Kitts and Nevis citizenship by investment programme.

Incentives and subsidies

Some countries will offer tax incentives, preferential tariffs and subsidies to foreign direct investors. Businesses may also be able to benefit from lower labour costs depending on where they are investing.

The different types of FDI

Horizontal FDI

Investing in the same type of business operation or project in a foreign country. For example, an investor with a property portfolio may invest in property abroad.

Vertical FDI

Investing in a complementary business or project in another country by moving to a different level of the supply chain. For example, investing in a foreign company that provides the raw materials needed.

Conglomerate FDI

Investing in an unrelated foreign business or project.

Platform FDI

Investing in a foreign country but the output is exported to a third country.

How CBI programmes facilitate FDI

We’ve already mentioned that foreign direct investors can gain citizenship in another country if they apply for a citizenship by investment programme. Only a handful of countries in the world currently offer the programme but there are still plenty of desirable nations to choose from. There is a high number of Caribbean participants, for example, including Antigua and Barbuda, Dominica, Grenada, and St Lucia. There are also European options such as Malta and Turkey.

There are often various investment options available. For example, an investor applying to the St Kitts and Nevis programme can invest either in the country’s Sustainable Growth Fund (used to improve the local healthcare, education, and infrastructure), government-approved real estate, a private home, or assets that fall under its ‘alternative investment option.’ Whereas Turkey’s programme will accept investment in real estate, deposits in a Turkish bank, government bonds, investment in fixed capital, or the creation of 50 jobs.

Bear in mind the barrier to entry is high (typically starting at US$100,000 depending on the country). However, for high-net-worth individuals who are interested in foreign direct investment, CBI programmes are certainly worth exploring.

As previously noted, another option is residence by investment, which can be a route to legal residence in many countries including Italy, Greece, Spain, and Singapore.