What Is an Outward Direct Investment (ODI)?
An outward direct investment (ODI) is a business strategy in which a domestic firm expands its operations to a foreign country.
ODI can take many different forms depending on the company. For example, some companies will make a green field investment, which is when a parent company creates a subsidiary in a foreign country. A merger or acquisition can also occur in a foreign country (and so may be considered an outward direct investment). Finally, a company may decide to expand an existing foreign facility as part of an ODI strategy. Employing ODI is a natural progression for firms if their domestic markets become saturated and better business opportunities are available abroad.
ODI is also called outward foreign direct investment or direct investment abroad. It can be contrasted with foreign direct investment, or FDI, which occurs in the opposite funding direction.
Key Takeaways
- An outward direct investment (ODI) is a business strategy in which a domestic firm expands its operations to a foreign country.
- Employing outward direct investment (ODI) is a natural progression for firms if their domestic markets become saturated and better business opportunities are available abroad.
- American, European, and Japanese firms have long made extensive investments outside their domestic markets.
- China has emerged as a large ODI player in recent years.
Understanding Outward Direct Investment (ODI)
The extent of a nation's outward direct investment can be seen as an indication that its economy is mature. ODI has been shown to increase a country’s investment competitiveness and has proven to be crucial for long-term, sustainable growth. American, European, and Japanese firms, for example, have long made extensive investments outside their domestic markets.
Because of their more rapid growth rates, emerging market economies often receive large amounts of ODI, as China has for the past two decades. The International Monetary Fund lists the top five countries as the United States, the Netherlands, Luxembourg, China, and the United Kingdom. But even some emerging market countries have begun to make investments abroad.
ODI and China
In 2015, Chinese overseas investment exceeded foreign direct investment(FDI) in China for the first time ever. In 2016, China's ODI peaked: Chinese companies invested over $180 billion overseas.Starting in 2017, ODI began a downtrend that has continued. In 2018, China's inflow of foreign direct investment (FDI) exceeded its ODI once again (making the country a net debtor once again). In 2020, China’s ODI increased to nearly $154 billion, from around $137 billion in 2019.
The majority of China's ODI is inflows to leasing and business services, wholesale, retail, and IT. Starting in 2016, Beijing started tightening its capital controls. As a result, many of China's overseas projects have been scaled back. These restrictive measures were intended to curb capital flight—when assets or money rapidly flow out of a country. At the same time, the domestic economic downturn in China, primarily due to the lingering impacts of the trade war with the U.S., has also hindered Chinese ODI.
Because of sluggish domestic growth, investment in foreign assets became less appealing. Previously, foreign investment by Chinese firms has been a significant driver of global asset prices, mostly as a result of the sale of property and mergers and acquisitions.
ODI vs. FDI
It is important to make a distinction between outward direct investment (ODI) and foreign direct investment (FDI). FDI occurs when a non-resident invests in the shares of a resident company. ODI occurs when a resident company invests in a non-resident country as part of a strategy to expand their business.
FAQs
An outward direct investment (ODI) is a business strategy in which a domestic firm expands its operations to a foreign country. Employing outward direct investment (ODI) is a natural progression for firms if their domestic markets become saturated and better business opportunities are available abroad.
What is overseas direct investment overview? ›
The aggregate amount of investment made by a person residing in India by way of Overseas Direct Investment, debt other than Overseas Portfolio Investment in foreign entities. It will include non-fund based facilities extended by such person to or on behalf of such foreign entity or entities.
What is direct investment quizlet? ›
Foreign direct investment is the purchase of physical assets or a significant amount of the ownership of a company in another country to gain a measure of management control.
What is foreign direct investment an overview? ›
Foreign direct investment (FDI) is an investment from a party in one country into a business or corporation in another country with the intention of establishing a lasting interest. Lasting interest differentiates FDI from foreign portfolio investments, where investors passively hold securities from a foreign country.
What is the difference between inward and outward direct investment? ›
FDI net inflows are the value of inward direct investment made by non-resident investors in the reporting economy. FDI net outflows are the value of outward direct investment made by the residents of the reporting economy to external economies.
What are the benefits of outward investment? ›
Increased employment, improved productivity, and overall economic growth. Increased competition from foreign firms, whether new or acquired, often forces competitors to increase their productivity so that they don't go out of business.
What is an example of direct investment? ›
Direct investment takes different shapes and forms. A company may enter a foreign market through so-called greenfield direct investment, in which the direct investor provides funds to build a new factory, distribution facility, or store, for example, to establish its presence in the host country.
Is foreign direct investment a good thing? ›
Foreign direct investment impacts the U.S. economy in many positive ways. For example, FDI: Creates New Jobs: U.S. affiliates of foreign companies (majority-owned) employ approximately 5.3 million U.S. workers, or 4.6% of private industry employment.
What are the advantages of direct investment? ›
Final answer: Direct investment allows a firm to maintain full control over its investment, a significant long-term strategic benefit that distinguishes it from portfolio investments, which are more focused on short-term gains and involve less managerial control.
What is direct investment also known as? ›
What Is Direct Investment? Direct investment is more commonly referred to as foreign direct investment (FDI). FDI refers to an investment in a foreign business enterprise designed to acquire a controlling interest in the enterprise.
Foreign direct investment (FDI) is a category of cross-border investment in which an investor resident in one economy establishes a lasting interest in and a significant degree of influence over an enterprise resident in another economy.
What is the difference between direct and indirect investment? ›
With indirect investment, the investor does not directly own the underlying assets but rather owns a portion of the fund that owns those assets. Direct investment, on the other hand, is when an individual buys and owns an asset, such as a stock or real estate property.
What is overseas direct investment? ›
ODI means Investments made in the overseas entities – a) by way of contribution to their capital or. b) subscription to the Memorandum of Association of a foreign entity or. c) by way of purchase of existing shares of a foreign entity through market purchase or.
What is the outward stock of foreign direct investment refers to? ›
Foreign Direct Investment (FDI) stocks measure the total level of direct investment at a given point in time, usually the end of a quarter or of a year. The outward FDI stock is the value of the resident investors' equity in and net loans to enterprises in foreign economies.
What is a simple example of foreign direct investment? ›
An example would be McDonald's investing in an Asian country to increase the number of stores in the region. Here, a business enters a foreign economy to strengthen a part of its supply chain without changing its business in any way.
What is the difference between inward and outward portfolio investment? ›
It is foreign money that comes into the domestic economy. Inward investment stands in contrast to outward investment, which is an outflow of investment capital from local entities to foreign economies.
What is an outbound investment? ›
Outbound foreign direct investment or outward foreign direct investment is the investment that is made by a domestic entity in a foreign country. Outward foreign direct investment is often used as a strategy to expand the operations of a business into a foreign economy.
What is the difference between inward and outward M&A? ›
M&A consists of three types of investment: inward investment (inbound M&A) and outward investment (outbound M&A), which leads to a holding exceeding 10% of the issued ordinary share capital, and domestic M&A, which leads to a holding exceeding 50% of the issued ordinary share capital.
What does negative outward FDI mean? ›
Negative values of FDI net outflows show that the value of direct investment made by domestic investors to external economies was less than the value of repatriated (disinvested) direct investment from external economies.
