What is foreign direct investment (FDI) and how does it impact markets?

Tesla expanded its global footprint by setting up manufacturing centres in China, Europe, and India. This kind of overseas investment – where a US-based electric vehicle (EV) maker puts capital into operations abroad – is known as foreign direct investment (FDI). It’s often a win-win, benefitting both the investor and the host country.

What is foreign direct investment (FDI)?

FDI is when an individual, company, or government from one country invests in a commercial enterprise based in another. The key word here is commercial. For example, when the Bill & Melinda Gates Foundation sends funds to tackle food shortages in Ethiopia, that wouldn’t qualify – it lacks a profit-driven motive and falls outside the FDI definition.

FDI differs from portfolio investment, which involves passive ownership of stocks or bonds, without any control or management role. FDI, by contrast, typically comes with decision-making power, a long-term stake, and an active interest in how the business is run.

While domestic investment stays within a nation's borders, FDI crosses them – injecting capital, technology, and expertise into the host country. It’s a direct contribution to economic output and productivity.,

Because FDI involves long-term interest and control, it also plays a strategic role in global market dynamics. It helps integrate economies, strengthen international ties, and transfer skills and innovation across borders – often acting as a powerful driver of development and trade.

Types of foreign direct investments

FDI can take different forms, each with distinct implications.

A horizontal FDI is when a company invests in a foreign country to produce the same goods or services it already offers at home. For example, an automaker setting up a new factory abroad. Common drivers include lower costs, market access, or local expertise.

A vertical FDI is when a company expands into a different stage of its supply chain abroad – either backward (eg, acquiring a supplier) or forward (eg, buying a distributor). A smartphone brand investing in a foreign chipmaker is one example.

Then there is the most diversified form - conglomerate FDI. Here a business invests in a completely different industry in another country, often to diversify risk or enter a high-growth market. For instance, a hotel chain backing a cryptocurrency mining firm overseas.

When learning the definition of foreign direct investment, it’s useful to distinguish greenfield and brownfield investments:

Greenfield: Building new facilities from scratch in a foreign country.
Brownfield: Acquiring or leasing existing operations, then expanding or upgrading them.

How does FDI relate to trading?

FDI influences financial markets directly—shaping stock prices, currency movements, and sentiment of traders and investors. Traders often monitor FDI news to assess macroeconomic strength. Large inflows can suggest economic confidence, boosting a country’s currency and stocks, particularly in sectors that attract capital. Sharp declines or outflows, on the other hand, may trigger volatility and depreciation.

For example, China outperformed all other countries in attracting the largest FDIs in 2020. The yuan soared 6.5% against the USD in that year, despite attempts by state banks to prevent the surge. The influx of $1.8 billion by Samsung in 2024 drove Vietnam’s stock market higher by 12%. Google's acquisition of a 7.73% stake for $4.5 billion in India’s Jio Platform took the shares of the parent company Reliance up by around 10% in just 2 weeks.

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Advantages of foreign direct investment

FDI offers a multitude of potential benefits to both investing and host nations:

Job creation and economic growth: it funds business expansion and boosts employment.
Infrastructure improvements: investment often goes toward transport, utilities, or logistics.
Technology transfer: foreign firms bring modern tech, management skills, and know-how.
Stronger global ties: FDI deepens cross-border business relationships and cooperation.
Market stability: long-term investment can reduce volatility by supporting capital flows.

Disadvantages and risks of foreign direct investment

Despite the advantages, FDI can pose challenges:

Political and economic risk: host nations may be exposed to conditions in investor countries.
Loss of control: heavy foreign ownership in strategic sectors can raise sovereignty concerns.
Disruptive competition: local firms may struggle to compete with large foreign entrants.
Currency risks: sudden FDI withdrawals can lead to currency depreciation and stock selloffs.

Industry examples of FDI in action

FDI grew to a record $41 trillion in 2023, with India, Mexico, Brazil, and other major emerging economies recording robust growth, according to IMF data released in 2025.

Under the programme known as the Belt and Road Initiative (BRI), China made massive infrastructure and development investments to connect Asia, Africa and Europe. China invested $51 billion in BRI projects in 2024 alone.

Amazon, which entered the Indian market in 2013, committed to investing $26 billion in the country by 2030. The ecommerce giant reported in 2025 that it had generated nearly $13 billion in cumulative exports from India and created nearly 1.4 million direct and indirect jobs.

Toyota plans to invest $2.2 billion in its operations in Brazil by 2030. The Japanese automaker aims at switching production to flex fuel hybrid vehicles at this plant.

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FAQs

What is the definition of foreign direct investment?

Foreign direct investment (FDI) is when a company or individual from one country invests directly in business operations located in another country. This usually involves establishing a significant degree of control or influence over the foreign business.

How does FDI differ from portfolio investment?

FDI gives the investor an active role in the management or operations of the foreign company. Portfolio investment, by contrast, involves the passive purchase of financial assets – like stocks or bonds – without influencing how the company is run.

Why do companies engage in foreign direct investment?

Companies pursue FDI to access new markets, benefit from lower production costs, secure resources, or establish a local presence. It also helps businesses diversify their operations and reduce exposure to risks in their home market.

What are the main risks associated with FDI?

For the host country, rapid shifts in capital flows can disrupt markets and weaken the currency. For investors, risks include political instability, changes in regulation, or economic downturns that could affect profitability or operations abroad.

How does FDI impact the stock market?

The inflow of FDI lends support to the stock market by triggering economic growth and the development of target sectors. This also boosts the overall market sentiment. Outflows can lead to market volatility and valuation declines. CFD trading helps here, as it provides opportunities in both rising and falling markets.