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Foreign Direct Investment in China

A foreign direct investment (FDI) is an investment in the form of a controlling ownership in a business in one country by an entity based in another country. It is thus distinguished from a foreign portfolio investment by a notion of direct control.

The origin of the investment does not impact the definition, as an FDI: the investment may be made either "inorganically" by buying a company in the target country or "organically" by expanding the operations of an existing business in that country.

Types of FDI

1. Horizontal FDI arises when a firm duplicates its home country-based activities at the same value chain stage in a host country through FDI.
2. Platform FDI Foreign direct investment from a source country into a destination country for the purpose of exporting to a third country.
3. Vertical FDI takes place when a firm through FDI moves upstream or downstream in different value chains i.e., when firms perform value-adding activities stage by stage in a vertical fashion in a host country.

Methods

The foreign direct investor may acquire voting power of an enterprise in an economy through any of the following methods:

• by incorporating a wholly owned subsidiary or company anywhere
• by acquiring shares in an associated enterprise
• through a merger or an acquisition of an unrelated enterprise
• participating in an equity joint venture with another investor or enterprise

Forms of FDI incentives

Foreign direct investment incentives may take the following forms:

• low corporate tax and individual income tax rates
• tax holidays
• other types of tax concessions
• preferential tariffs
• special economic zones
• EPZ – Export Processing Zones
• Bonded warehouses
• investment financial subsidies
• free land or land subsidies
• relocation & expatriation
• infrastructure subsidies
• R&D support
• Energy
• derogation from regulations (usually for very large projects)

Governmental Investment Promotion Agencies (IPAs) use various marketing strategies inspired by the private sector to try and attract inward FDI, including diaspora marketing.

• by excluding the internal investment to get a profited downstream.

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