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
(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)