foreign direct investment

The International Monetary Fund (“IMF”) defines foreign direct investment (“FDI”) as a “cross-border investment” in which an investor that is “resident in one economy [has] control or a significant degree of influence on the management of an enterprise that is resident in another economy.” See: IMF, Balance of Payments and International Investment Position Manual 100 (6th ed. 2009). The direct investor’s managerial role distinguishes FDI (an active form of investment) from portfolio investment (a passive form).

FDI plays a key role in globalization, including by “creat[ing] direct, stable and long-lasting links between economies” and “encouraging the transfer of technology and know-how between economies.” See: The Secretary-General of the Organization for Economic Co-operation and Development (“OECD”), OECD Benchmark Definition of Foreign Direct Investment 14 (4th ed. 2008). Today, unlike during the mass nationalizations of the 1950s (in the Soviet Bloc) and 1970s (in the Middle East), FDI enjoys fairly broad international support.

Governing Laws

Both domestic (of the investing and recipient economies) and international laws govern FDI. Domestic investment codes typically include provisions to attract FDI and safeguard direct investors, such as promises of national treatment, most-favored-nation treatment, tax incentives, security measures, and/or dispute resolution fora. In the event of an investor-State dispute, investors generally must exhaust local remedies before turning to other nations’ or international dispute resolution fora, such as the International Centre for Settlement of Investment Disputes, an international arbitration institution. 

International law also governs FDI. Sources of international law include, inter alia; multilateral treaties, bilateral investment treaties (“BITs”), customary international law, and judicial decisions. Multilateral treaties, such as the Agreement on Trade-Related Investment Measures (regarding trade in goods) and the Agreement on Trade-Related Aspects of Intellectual Property (regarding intellectual property) harmonize disparate domestic laws. Attempts, however, to negotiate a comprehensive, multilateral investment treaty have failed. As such, the U.S. views BITs as particularly important and has negotiated 40 that are currently in force.

Risks and Insurance

International law also addresses risks associated with FDI. For example, United Nations General Assembly resolution 1803 (XVII) of 14 December 1962, which received broad support, called for “adequate compensation” in the event of nationalization. And the Convention Establishing the Multilateral Investment Guarantee Agency, a multilateral treaty, established the Multilateral Investment Guarantee Agency (“MIGA”) in an effort to promote FDI in developing economies. MIGA insures against such risks as expropriation, war, terrorism, civil disturbance, currency incontrovertibility, and breach of contract.

Private insurance and insurance from the Overseas Private Investment Corporation, a federal agency, is also available to American investors to insure against such political risks as expropriation, political violence, and currency incontrovertibility. 

[Last updated in May of 2023 by the Wex Definitions Team]