The World Bank defines foreign direct investment (FDI) as a “category of cross-border investment associated with a resident of one economy having control or a significant degree of influence over the management of an enterprise resident in another economy”.
As such, the key criterion for an investment to qualify as FDI is that the investor has sufficient control over the underlying asset to directly benefit the local economy in a number of tangible ways, including creating jobs, attracting new businesses and potentially paving the way for more investment. investment.
Like all definitions, however, it has nuances and is subject to interpretation and implementation.
According to the World Bank Glossary, for example, the phrase “control or a significant degree of influence over management” emphasizes the investor’s enduring interest in the company and is assumed to be achieved “when an investor direct holds equity that entitles it to 10% or more of the voting rights in the direct investment business”.
However, the bank also points out that in practice many countries set a higher threshold.
Stefan Kratzch, head of industrial development in the investment promotion division of the United Nations Industrial Development Organization, wrote his Doctoral thesis on this subject and refers to the table of Brouthers and Hennart to clarify terms.
Within this framework, FDI is divided into new projects and acquisitions, each divided into two sub-categories according to type of ownership, with joint venture versus whole ownership as criteria.
“But in reality, these definitional issues become extremely hazy and that’s why there is so much uncertainty about the actual levels of FDI stocks and flows,” he adds.
The FPI and the link with the real economy
Within this fairly broad and interpretable landscape, foreign portfolio investment (FPI) has begun to gain traction and its use is being discussed at various industry levels.
Strictly speaking, REIT takes place when an investor buys securities in a foreign financial market, mainly comprising stocks, bonds and funds. As securities can be sold quickly and do not carry with them a significant portion of the underlying assets, the industry consensus has always been that REITs do not impact the local economy directly enough to be counted. like IDEs.
On top of that, investment promotion agencies (IPAs) have their hands full, says Kratzch.
“Frankly, I’m not entirely sure APIs should engage more with REITs on top of their duties and mandates to promote both greenfield and brownfield FDIs,” he says. “In fact, APIs even fail to properly promote and facilitate FDI in its various facets, especially on the follow-up front with existing FDI affiliates.”
While there is no doubt that IEPs are further removed than FDI from the real economy, a OECD report argues that both can promote sustainable growth in both developing and developed countries.
“In light of the various capital crises of recent years, there has been a tendency to denigrate portfolio investment, while singing the praises of direct investment,” the report said. “Yet it is also recognized that efficient capital markets help mobilize finance for growth and development.”
According to the report, the beneficial effects of REITs include increased liquidity, more discipline and know-how, and better functioning of stock markets in domestic capital markets.
“REIT increases liquidity in domestic capital markets and can also help develop market efficiency,” the report said. “As markets become more liquid, deepen and widen, a wider range of investments can be funded.
“New businesses, for example, are more likely to receive seed funding. Savers have more possibilities to invest with the assurance that they will be able to manage their portfolio or sell their financial securities quickly if they need to access their savings. In this way, liquid markets can also make longer-term investments more attractive.
The role of mergers and acquisitions as a form of REIT
Focusing on REITs as well as FDI to strengthen domestic capital markets is a logical strategy for developing countries that often lack a healthy market themselves, says Achim Hartig, Managing Director of Germany Trade & Investment .
“The FPI attraction is something I’ve mostly encountered with Indian APIs,” he says. “They introduced this on a very large scale to stimulate financial investment in the local market. It is less relevant in Germany and Europe where financial and capital markets are already robust and very active.
Although Hartig does not see REITs as creating real value for the local economy, he says there are discussions around focusing on mergers and acquisitions (M&A) as a new source of FDI.
“The caveats should also be applied to mergers and acquisitions,” he adds. “This type of investment tends to be more of a commitment to a product whereas FDI is a commitment to an ecosystem.”
Hartig’s preference, however, is not a total ban on the use of capital to boost FDI levels as he admits there is a need for it in certain sectors. “Financial FDI [which technically falls under the FPI remit] is needed in infrastructure development, for example, where capital markets and financial investors can help accelerate the process,” he explains.
Infrastructure is certainly an area in which IPA ApexBrasil has worked as an intermediary with foreign financial and institutional investors to bring them to invest in the country.
Its marketing chief, Adalberto Netto, said that in 2020, of the total of $227 billion (R$1.15 billion) in REITs in the country, $162 billion were foreign capital investments from funds. of private equity and venture capital, resulting in $20 billion. invested in 73 projects.
“The key message here is that there is a very large pool of capital looking for opportunities in emerging markets and that APIs can add value to their role by tapping into them,” Netto said.
However, he is very careful to distinguish between this type of investment and the simple buying and selling of shares on the financial markets.
“Private equity and venture capital funds play a very important role in infrastructure investment and privatization,” says Netto. “There are specific financial instruments such as bonds, global certificates of deposit, US certificates of deposit, etc., which have an important role to play. However, we do not serve speculative capital and we do not see this type investment only as an important vehicle for creating liquidity, but only if it is part of a long-term strategy.
Operating this type of REIT, however, is quite different from navigating the traditional IDE landscape and requires preparation and expertise.
“Having access to institutional investors such as fund managers, sovereign wealth funds, funds of funds and companies involved in private equity and venture capital means that APIs need to understand the financial instruments involved and build their credibility. says Netto. “ApexBrasil has created a specific unit to respond to these investors.
“The private equity and venture capital market is worth $1.2 billion. This is a huge pool of capital that can be helpful in diversifying markets, especially in the changing geopolitical and macroeconomic landscape we currently face.