What Is Direct Investment?
An investor's purchase of a controlling interest in a company or asset is referred to as a direct investment. This can be accomplished by purchasing all or a substantial portion of the company's stock or by purchasing physical assets such as real estate or infrastructure.
Renowned economist Karl P. Sauvant, Founding Executive Director of the Vale Columbia Center on Sustainable International Investment at Columbia University, defines direct investment as "investment by a firm in a foreign country through the acquisition of a local company or the establishment of a new venture, with the intention of controlling the operations of the acquired or newly established firm."
More Thorough Understanding of the Term
Direct investment is distinct from indirect investment, in which an investor purchases shares in a fund or investment vehicle that subsequently invests in various assets. Direct investing gives investors more control over their investments and allows them to make strategic decisions directly affecting the company or asset.
Direct investment can provide various benefits, including higher potential returns, better control over decision-making, and the capacity to diversify a portfolio. Yet, it entails more risk because the investor is exposed to the dangers associated with the specific company or asset they have invested in.
Types of Direct Investment
Direct investment is also referred to as Foreign Direct Investment (FDI). There are several forms of FDI, including:
- Horizontal Direct Investment
- Vertical Direct Investment
- Conglomerate Direct Investment
Horizontal Direct Investment
When a firm invests in another company that operates in the same industry and at the same production stage, this is referred to as a direct investment. The goal is to improve the investor's market position and obtain access to new markets, clients, or technologies.
Vertical Direct Investment
This direct investment occurs when one company invests in another company in the same industry that is at a different production stage. The goal of owning suppliers or distributors is to control the supply chain and cut expenses.
Conglomerate Direct Investment
Investing in a company that operates in a different industry or has no visible connection to the investor's core business is an example of direct investment. By owning a range of firms, the investor's portfolio is diversified, and risk is reduced.
Example
- In horizontal direct investment, for instance, a beverage firm might invest in another beverage company in another country.
- In vertical direct investment, for instance, a car manufacturer from the USA may invest in a tire manufacturing company in China.
- For example, a technological firm may invest in a healthcare firm in a conglomerate direct investment.
In Sentences
- Direct investment can provide various benefits, including higher potential returns, better control over decision-making, and the capacity to diversify a portfolio.
- Direct investment can be a viable choice for investors seeking long-term growth and higher profits.