Foreign direct investment (FDI) is an investment made by a resident of one economy in an enterprise in another economy with the aim of establishing a lasting interest and a significant degree of influence over its management. Under the international statistical standards of the IMF and the OECD, a stake of 10% or more of the voting power marks the line between direct investment and ordinary portfolio investment. FDI is made mainly by multinational corporations, but also by private equity firms, state-owned companies and sovereign wealth funds.
FDI is recorded in the financial side of the balance of payments, often loosely called the capital account. It differs from portfolio flows, which buy shares or bonds without control, and from bank lending. Governments court FDI for jobs, technology and exports, while also screening some deals on national security grounds.
Foreign direct investment in plain terms
Imagine two ways of putting money into a bakery in another town. You could buy a few of its shares and wait for dividends, with no say over the recipes. Or you could buy a large part of the bakery, or open a new branch yourself, hire staff and decide what goes in the oven. The second is direct investment: you are not just a passenger, you help drive.
Because direct investors run things, they tend to stay through bad times. A factory cannot be sold in an afternoon the way shares can. That staying power is why countries often prefer FDI to quick, mobile money that can leave at the first sign of trouble.
Types of FDI
- Greenfield investment. The investor builds a new facility from the ground up, such as a new car plant or data centre. See also greenfield project.
- Mergers and acquisitions. The investor buys an existing foreign company or a controlling stake in it through mergers and acquisitions.
- Brownfield and expansion investment. An existing facility is bought and refitted, or a foreign affiliate reinvests its earnings.
- Horizontal and vertical FDI. Horizontal FDI copies the same activity abroad to serve that market; vertical FDI places different stages of a supply chain in different countries to cut costs.
FDI flows have three statistical components: new equity capital, reinvested earnings of foreign affiliates and intra-company debt between parent and affiliate. Reinvested earnings can be a large share of the total, so FDI can rise even when no new money crosses a border.
How big FDI is and where it goes
UNCTAD's World Investment Report 2025 estimated that global FDI flows fell by about 11% in 2024 to roughly 1.5 trillion dollars, the second annual decline in a row. Much of the swing came from volatile flows through conduit economies in Europe; excluding them, UNCTAD found a small rise. The United States remained the largest single recipient, with about 279 billion dollars of inflows in 2024, while developing Asia received the largest regional share.
Headline figures are distorted by "phantom" FDI routed through holding companies in offshore financial centres and low-tax jurisdictions for tax reasons. Statisticians at the OECD and IMF therefore also look at FDI by "ultimate investing economy" to see who really stands behind an investment. Transfer pricing between a parent and its affiliates also affects reported profits and reinvested earnings.
Policy: incentives and screening
Most countries actively seek FDI. Common tools include tax holidays, special economic zones, investment promotion agencies and bilateral investment treaties that protect foreign investors. India lets most sectors receive FDI through an "automatic route" without prior approval, while sensitive sectors need government sign-off. Pakistan's Board of Investment and the Special Investment Facilitation Council, set up in 2023, aim to fast-track large projects, including Gulf investment.
At the same time, screening of foreign acquisitions has tightened. In the United States, the Committee on Foreign Investment in the United States (CFIUS) reviews deals for national security risks, and its powers were widened by the Foreign Investment Risk Review Modernization Act of 2018. The EU's FDI Screening Regulation has applied since October 2020, and the UK's National Security and Investment Act 2021 introduced mandatory notification in 17 sensitive sectors. Some governments also restrict outward investment, for example in advanced technology.
Benefits, costs and debate
Supporters argue that FDI brings capital, management skills and technology, links local suppliers to global markets and adds to productivity through spillovers. It is a more stable source of external finance than hot money and does not add to external debt in the way borrowing does.
Critics point to profit repatriation that later drains foreign exchange, tax incentives that cost more than they deliver, competition between governments that erodes tax bases, and the risk that foreign firms crowd out local ones. Empirical studies find that spillovers are not automatic: they depend on the host country's human capital, institutions and links between foreign and local firms. Debates over sanctions, supply chain security and industrial policy have made FDI more political since the late 2010s.