FDI (foreign direct investment) can be generally described as the transfer of capital from a country to another country. FDI is described as processing some or all of the influence of capital in the host country. The Economic Co-operation and Development (OECD) group regulates that an FDI investor must hold at least 10 percent of voting shares. This regulation makes it different from cross-border bank loans and portfolio investment (which does not have any direct management influence over property in the host country). There are two major type of FDI: greenfield investment and brownfield investment.

The nature of greenfield investment is actually quite simple: a type of investment that is foreign in nature and focuses on targets such as overseas manufacturing facilities. Such factories or properties are built from scratch by investors or contractors. A representative example of greenfield FDI is IKEA. IKEA is owned by a Swiss company that manufactures mainly home accessories and furniture. What they do when investing in another country to expand their customer base is to construct individual buildings on undeveloped land. It then hires people from the local area and runs the business by itself. With a minimum amount of dependence on other contractors and the maximum ability to control its operation, IKEA successfully runs hundreds of locations across the world in countries such as the U.S. and in China. However, a downside of greenfield investment is that it is also an extreme form of investment. Because of heavy investment at the beginning of the project, the return on investment takes over a longer period, thereby seriously weakening the company’s cash flow.

(cseindiaportal)

As always, there is more than one form of investment in any field of business. To address the limitations of greenfield investment, brownfield investment has been introduced. Brownfield investors also invest their capital in foreign countries, but instead of setting up everything from scratch, they buy out or invest in existing companies with established properties. A representative example is Wanda Cooperation and AMC. In 2008, with the onset of the global financial crisis, AMC edged closer to declaring bankruptcy. However, Wanda saw an opportunity to enter a foreign market and thus bought AMC shares, becoming the controlling shareholder. As a result, AMC recovered with support from Wanda and retained their dominant position in the U.S. movie theater market, and Wanda also benefitted. These forms of investment can reduce the level of risk for cash flow but require a deep review of the market future.

In sum, with an increase in the importance of FDI in the global economy, there is a growing need for stable and well-tailored FDI regimes that can promote national well-being and sustainability. The normative power of law being one way to achieve this, and with the growth of FDI, it can efficiently fill this gap.

Xiaolin Qi