Direct investment

Direct investment refers to the acquisition of a controlling interest in a business or asset by an investor from another country.
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Updated on Jun 10, 2024
Reading time 3 minutes

3 Key Takeaways

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  • Ownership Stake: Direct investment involves acquiring a substantial ownership stake in a foreign business or asset.
  • Long-Term Commitment: It signifies a long-term commitment by the investor to actively participate in the management and operations of the invested entity.
  • Strategic Objectives: Direct investment is often driven by strategic objectives such as market expansion, access to new technologies, or diversification of business interests.

What is Direct Investment?

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Direct investment occurs when an investor, typically a corporation or an individual, acquires a significant ownership interest in a foreign company, enterprise, or real asset. Unlike portfolio investment, which involves passive investments in stocks or bonds, direct investment implies active involvement in the management, decision-making, and strategic direction of the invested entity.

Importance of Direct Investment

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Direct investment plays a vital role in global business and economic development for several reasons:

  • Market Expansion: Direct investment allows companies to enter new markets, expand their customer base, and capitalize on growth opportunities in foreign economies.
  • Technology Transfer: Investors may bring advanced technologies, know-how, and managerial expertise to the invested entity, contributing to innovation and productivity improvements.
  • Job Creation and Economic Growth: Direct investment can stimulate job creation, infrastructure development, and overall economic growth in host countries by injecting capital and fostering entrepreneurship.
  • Risk Diversification: For investors, direct investment provides opportunities to diversify their business interests, mitigate risks, and access new sources of revenue.

How Direct Investment Works

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Investment Process

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The direct investment process typically involves the following steps:

  1. Market Research: Identifying potential investment opportunities and conducting thorough market research to assess the viability and attractiveness of target markets.
  2. Due Diligence: Conducting due diligence to evaluate the financial health, regulatory environment, and business prospects of the target entity.
  3. Negotiation and Valuation: Negotiating the terms of the investment, including the purchase price, ownership stake, governance structure, and exit strategies.
  4. Transaction Execution: Finalizing the investment agreement, completing legal and regulatory requirements, and transferring funds to acquire the ownership stake.
  5. Post-Investment Management: Actively participating in the management, decision-making, and strategic planning of the invested entity to achieve the desired objectives and maximize returns.

Examples of Direct Investment

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  • Foreign Direct Investment (FDI): A multinational corporation acquiring a majority stake in a local manufacturing company in a foreign country to expand its global footprint and access new markets.
  • Infrastructure Development: A foreign investor funding the construction of roads, bridges, power plants, or telecommunications networks in a developing country to support economic growth and improve infrastructure.
  • Joint Ventures: Two companies from different countries forming a joint venture partnership to collaborate on a specific project or enter a new market together, sharing resources, risks, and rewards.

Real-World Application

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Direct investment is a key driver of globalization, fostering cross-border trade, technology transfer, and economic integration. It enables companies to pursue growth opportunities beyond their domestic markets and contributes to the development and prosperity of both home and host countries. By making strategic direct investments, businesses can strengthen their competitive position, expand their market presence, and create value for shareholders and stakeholders alike.


Sources & references

Arti

Arti

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Arti is a specialized AI Financial Assistant at Invezz, created to support the editorial team. He leverages both AI and the Invezz.com knowledge base, understands over 100,000 Invezz related data points, has read every piece of research, news and guidance we\'ve ever produced, and is trained to never make up new...