Foreign Direct Investment (FDI): What It Is, Types, and Examples

Updated October 03, 2025

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Definition

Foreign direct investment (FDI) is a substantial, long-term investment made by a company or government into a foreign project or firm.

What Is Foreign Direct Investment (FDI)?

Foreign direct investment (FDI) refers to an ownership stake in a foreign company or project made by an investor, company, or government from another country. FDI is generally used to describe a business decision to acquire a substantial stake in a foreign business or to buy it outright to expand operations to a new region.

It's important to note that the term usually doesn't describe a typical stock investment in a foreign company through a brokerage platform. It's more complex than that. FDI is a key element in international economic integration because it creates stable and long-lasting links between economies.

Key Takeaways

Foreign direct investment (FDI) is a substantial, lasting investment made by an investor, company, or government into a foreign concern.
FDI investors typically take controlling positions in foreign firms or joint ventures and are actively involved in their management.
The investment may involve acquiring a source of materials, expanding a company’s footprint, or developing a multinational presence.
The top recipients of FDI over the past several years have been the United States and China.
The U.S. and other countries in the Organisation for Economic Co-Operation and Development (OECD) are top contributors to FDI beyond their borders.

Conceptual illustration showing the meaning of Foreign Direct Investment (FDI) featuring islands and investor imagery. Definition: The purchase of an interest in a company by an investor in another country. — Lara Antal / Investopedia

How Foreign Direct Investment (FDI) Works

Foreign direct investment is a stake in a company or project by a foreign entity. Companies or governments considering an FDI generally consider target firms or projects in open economies that offer a skilled workforce and above-average growth prospects for the investor. Light government regulation also tends to be prized.

FDI frequently goes beyond mere capital investment. It may also include the provision of management, technology, and equipment. A key feature of FDI is that it establishes effective control of the foreign business or at least substantial influence over its decision-making.

The net amounts involved in FDI are substantial, with roughly $1.5 trillion of foreign direct investments made in 2024; however, this was an 11% drop.

FDI inflows as a percentage of gross domestic product (GDP) are a good indicator of a nation’s appeal as a long-term investment destination. FDI as a percentage of GDP is often significantly higher for smaller, dynamic economies.

Important

Foreign direct investment tanked globally due to the COVID-19 pandemic in 2020, according to the United Nations Conference on Trade and Development. The total $859 billion global investment that year compared with $1.5 trillion the previous year. China dislodged the U.S. in 2020 as the top draw for total investment, attracting $163 billion compared with investment in the U.S. of $134 billion. Global FDI bounced back by 77% in 2021.

Special Considerations

Foreign direct investments can be made in various ways, including opening a subsidiary or associate company in a foreign country, acquiring a controlling interest in an existing foreign company, or using a merger or joint venture with a foreign company.

The threshold for an FDI that establishes a controlling interest is a minimum 10% ownership stake in a foreign-based company, per guidelines established by the Organisation for Economic Co-operation and Development (OECD). However, that definition has been subject to debate; some argue that effective controlling interest in a firm can be established by acquiring less than 10% of the company’s voting shares.

FDI in China and India

China’s economy has been fueled by an influx of FDI targeting the nation’s high-tech manufacturing and services. Relaxed FDI regulations in India allow 100% foreign direct investment in single-brand retail without government approval.

Types of Foreign Direct Investment

Foreign direct investments are commonly categorized as horizontal, vertical, or conglomerate.

A company establishes the same type of business operation in a foreign country as it operates in its home country with a horizontal FDI. A U.S.-based cellphone provider buying a chain of phone stores in China would be an example.
A business acquires a complementary business in another country in a vertical FDI. A U.S. manufacturer might acquire an interest in a foreign company that supplies it with the raw materials it needs.
A company invests in a foreign business that is unrelated to its core business in a conglomerate FDI. The investing company has no prior experience in the foreign company’s area of expertise, so this often takes the form of a joint venture.

Examples of Foreign Direct Investment

Foreign direct investments may involve mergers, acquisitions, or partnerships in retail, services, logistics, or manufacturing. They indicate a multinational strategy for company growth.

They can also run into regulatory concerns. In 2020, U.S. company Nvidia announced its planned acquisition of ARM, a U.K.-based chip designer. In August 2021, the U.K.’s competition watchdog investigated whether the $40 billion deal would reduce competition in industries reliant on semiconductor chips. The deal was called off in February 2022.

What's the Difference Between Foreign Direct Investment and Foreign Portfolio Investment?

Foreign portfolio investment is the addition of international assets to the portfolio of a company, an institutional investor such as a pension fund, or an individual investor. It's a form of portfolio diversification achieved by purchasing a foreign company's stocks or bonds.

Foreign direct investment requires a substantial and direct investment in or the outright acquisition of a company based in another country, not just its securities. FDI is generally a larger commitment made to enhance a company's growth. FPI and FDI are generally welcome, particularly in emerging nations. FDI involves a greater responsibility to meet the regulations of the country that hosts the company receiving the investment.

What Are the Advantages and Disadvantages of Foreign Direct Investment?

FDI can foster and maintain economic growth in both the recipient country and the investing country. Developing countries have encouraged FDI to finance the construction of new infrastructure and create jobs for their local workers. Multinational companies benefit from FDI as a means of expanding their footprints into international markets. A disadvantage of FDI is that it involves the regulation and oversight of multiple governments, leading to a higher level of political risk.

What Are Some Examples of Foreign Direct Investment?

The Chinese initiative known as One Belt, One Road (OBOR) is a sweeping example of FDI. This program, sometimes referred to as the Belt and Road Initiative, involves China's commitment to substantial FDI in a range of infrastructure programs throughout Africa, Asia, and even parts of Europe.

The program is typically funded by Chinese state-owned enterprises and organizations with deep ties to the Chinese government. Similar programs are undertaken by other nations and international bodies, including Japan, the United States, and the European Union.

The Bottom Line

FDI involves the direct investment by companies or governments into foreign firms or projects. It accounts for an immense amount of cash flows worldwide, with the U.S. and China leading in the FDI inflow statistics. FDI funds can be a substantial part of the overall GDP for smaller and developing countries. Foreign portfolio investment (FPI) is related to FDI but instead involves owning the securities issued by firms, such as stock in foreign companies, rather than direct capital investments.