What is Foreign Direct Investment (FDI)? Meaning, Types, Benefits & Examples

Foreign direct investment, or FDI, refers to an investment made by a company or individual from one country into a business in another country with the intent of establishing a lasting interest and a degree of influence over management. In practical terms, it usually involves building or buying productive assets such as factories, offices, logistics facilities, or service operations abroad, or taking an ownership stake large enough to participate in decision-making.

FDI is commonly distinguished from portfolio investment, which involves buying financial assets such as stocks or bonds without seeking control of the underlying business operations. Because FDI is tied to physical operations and long-term business plans, it tends to move with corporate strategy, supply chains, and market access considerations rather than short-term market swings.

How foreign direct investment works

FDI can occur when a foreign investor establishes a new business from the ground up (often described as “greenfield” investment), expands an existing operation, or acquires part or all of a local company. The defining feature is the investor’s intention to participate in management or exert significant influence, often reflected in ownership thresholds used in international statistics and reporting frameworks.

In many cases, the investment is broader than a simple cash transfer. It can include the contribution of machinery, intellectual property, technology, management systems, and access to global customers and suppliers. FDI frequently arrives alongside contracts for construction, hiring and training plans, and long-term procurement arrangements that bind the host economy to international production networks.

Types of FDI

FDI is often grouped into categories based on an investor’s objective and how the investment is structured. These distinctions matter for policymakers and businesses because the economic effects can differ depending on whether the investment targets local consumption, export production, or upstream resources.

Common types of FDI include the following:

Greenfield investment: Building new facilities and operations in the host country, typically associated with new jobs and new capacity.
Mergers and acquisitions (M&A): Buying or combining with an existing local firm, which can bring capital and expertise but may not immediately expand capacity.
Horizontal FDI: Replicating home-country business activities in another country to serve a local or regional market.
Vertical FDI: Investing in suppliers or distribution to secure inputs or reach customers, often tied to global supply chains.
Conglomerate FDI: Entering an unrelated business area in the host country, typically less common and more complex.

Another useful distinction is between inward FDI (investment flowing into a country) and outward FDI (investment made by local firms overseas). Both can reshape domestic competition and productivity: inward FDI can raise standards and technology diffusion, while outward FDI can help local champions scale but may shift some activity abroad.

Benefits: why FDI matters for developing economies

FDI is widely watched because it can expand productive capacity and create linkages that go beyond financing. When foreign firms establish operations, they may hire local workers, contract with local suppliers, and transfer know-how in areas such as quality control, logistics, cybersecurity, and management. Over time, these spillovers can help domestic firms upgrade and compete in higher-value segments.

For developing countries, including the Philippines, FDI can complement domestic investment in building infrastructure-adjacent ecosystems such as industrial parks, export processing zones, and services hubs. It can also diversify sources of growth by bringing in new industries, supporting export revenue, and broadening the tax base—although the net fiscal impact depends on incentives, profit repatriation, and compliance.

FDI can also improve access to global markets. Multinational firms often integrate host-country operations into regional supply chains, allowing local workers and suppliers to participate in production for international customers. For an archipelagic economy with strong services and manufacturing potential, this integration can support demand for logistics, ports, warehousing, business process services, and specialized skills.

Risks and drawbacks

FDI is not universally beneficial, and its outcomes depend on governance, competition policy, labor-market conditions, and the structure of the investment. One risk is that foreign firms may outcompete smaller local businesses, particularly in sectors where scale and access to capital matter. This can concentrate market power unless competition rules and enforcement are strong.

Another concern involves profit repatriation and external vulnerability. When foreign-owned companies remit dividends or royalties abroad, the host economy may experience pressure on the balance of payments during periods of global stress. Heavy reliance on a narrow set of investors or sectors can also expose the economy to sudden shifts in corporate strategy, trade policy, or geopolitical tensions.

There are also social and environmental risks if standards are weak or enforcement is uneven. Large projects can affect land use, communities, and natural resources, especially in extractive industries. Labor issues may arise if skills development and workplace protections do not keep pace with expansion, or if subcontracting leads to uneven compliance across supply chains.

Real-world examples of FDI

FDI can be seen in everyday business activity across industries. A global automaker that builds an assembly plant and a supplier network in a host country is a typical example of greenfield and vertical investment. A foreign retailer that purchases a controlling stake in a domestic chain is an example of M&A-driven FDI aimed at market expansion.

FDI is also common in services. International banks and insurance firms may establish subsidiaries subject to local regulation. Technology and business services companies can open delivery centers that serve overseas clients. Infrastructure-related investments—such as renewable energy projects, data centers, ports, and telecommunications—often involve foreign capital and technical partners, though the classification depends on ownership structure and control.

In the Philippine context, FDI is frequently discussed in relation to job creation, export competitiveness, and technology transfer, particularly in manufacturing, electronics, renewable energy, logistics, tourism-linked facilities, and IT-enabled services. The impact varies by project, with stronger results typically linked to clear local sourcing pathways, skills development, and reliable infrastructure.

What businesses and investors track

Companies considering cross-border expansion typically evaluate market size, labor skills, input costs, infrastructure reliability, and regulatory predictability. They also weigh currency and financing conditions, the stability of legal frameworks, and the ease of moving goods and data across borders. For many industries, proximity to customers and supply-chain resilience has become as important as labor costs alone.

Governments, meanwhile, monitor FDI as a signal of competitiveness and confidence, but also as a policy balancing act. Incentives can attract projects, yet overly generous packages can reduce net public benefit if they are not tied to measurable outcomes. Many economies focus on the quality of FDI—such as technology intensity, training commitments, and local supplier development—rather than the headline value alone.

Disclaimer: This article is for general information only and does not constitute investment, legal, or tax advice. Readers should consult qualified professionals and official sources for decisions involving cross-border investments.