Foreign Direct Investment plays a significant role in the process of economic development.
According to international guidelines based on the recommendations by the IMF in its Balance of Payments Manual (fifth editions, 1993) FDI is defined as international investment that reflects the objective of a resident entity in one economy (foreign direct investor or parent enterprise) obtaining a lasting interest and control in an enterprise resident in an economy other than that of the foreign direct investor.
“Lasting interest” implies the existence of a long-term relationship between a direct investor and the enterprise and a significant degree of influence on the management of the enterprise.
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The BOP Manual states that the direct investor should own or control at least 10 percent of the ordinary shares, voting power or equivalent. The three basic components of FDI flows are
(i) Equity Capital:
This constitutes the value of the MNC’s investment in shares of an enterprise in a foreign country. An equity capital stake of 10 percent or more, is normally considered ns a threshold for the control of assets.
(ii) Reinvested earnings:
This consists of the sum of direct investor’s share (in proportion to direct equity participation) of earnings not distributed as dividends by subsidiaries or associates, and earnings of branches not remitted to the direct investor.
(iii) Other direct investment capital or intercompany debt transactions:
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This cover the borrowing and lending of funds including debt securities and supplier’s credits between direct investors and subsidiaries, branches and associates.
FDI flow with a negative sign indicate that at least one of three components of FDI is negative and is not offset by positive amounts of the other components.