Although the use of foreign direct investment (FDI) incentives is a controversial economic policy, it is thriving worldwide as governments compete for foreign business and investment. Traditionally, FDI was thought of as a way to attract multinational corporations (MNC), but there is room for the discussion of the ways fast-growing startups and SMBs can take advantages of these FDI incentives as well. This is the first article in a series on foreign direct investment for fast-growing startups and small and medium-sized businesses (SMBs). This first article will lay out the background and basics of FDI, the second will discuss FDI strategy, and then several articles on country-specific incentives will follow.
What is foreign direct investment?
Foreign direct investment is an investment by a company or an individual in business interests in another country. This business interest is usually the establishment of a business in or acquiring business assets, e.g., ownership of or a controlling interest in a foreign company, in another country. However, FDI is not just an investment in a company, i.e., the purchase of shares, it is an investment that establishes a controlling interest (OECD guidelines consider at least a 10% stake a controlling interest) in the foreign company. The ways in which companies establish a business in a foreign country can differ, for example, it could be the formation of a company or just the creation of a subsidiary or setting up manufacturing operations, a common aspect of international business expansion. Another common way for companies to invest is that companies can acquire a controlling interest in a company through mergers, acquisitions, and joint ventures.
What are foreign direct investment incentives?
Many governments (at the city, state, regional, and country level) offer companies and individuals incentives to invest in business interests in their locality. Governments offer FDI incentives with the expectation that these investments will raise local employment, exports, tax revenue, and that knowledge and technology will spill over to their private sector. Incentives vary by government, industry, business function, and type. Because of this, FDI is particularly attractive and beneficial to developing and emerging markets, however, it is not confined to only these countries. Generally FDI incentives take one of two forms, fiscal (tax) or financial, but governments have increasingly gotten creative in the types of incentives they offer.
Fiscal incentives are designed to reduce a company’s tax burdens, and include reduced corporate tax rates, tax holidays, accelerated depreciation allowances on capital taxes, exemption from import duties and duty drawbacks on exports. Financial incentives include direct government contributions such as grants and preferential loans. Other incentives can include market preferences, monopoly rights, and free co-working spaces or help in setting up offices.
How can startups and SMBs take advantages of foreign direct investment incentives?
Although traditional foreign direct investment incentives are particularly advantageous to larger multinational corporations, there are advantages for fast-growing startups and SMSs as well. Startups have become a highly sought-after segment because of their high level of innovation, rapid growth, and increasing investment over time into new markets. That is why governments have started getting creative and increasing their incentives that are more appropriate for these smaller, less financially flexible companies.
Some of these newer creative incentives include hiring assistance, operational support, networking, R&D funds or credits, office space (co-working), incubators, mentorship, introductions, startups grants. The shift to increase these types of incentives is promising for startup communities since most smaller companies could not invest the amount required of traditional FDI incentives. Because of the quick increase in these incentives and the rapid expansion of startup communities worldwide, they can be difficult to navigate. Globig’s next article will discuss how to develop your FDI strategy and will be followed by country-specific articles. These country-specific articles will include insights and resources from local governments and experts.
Although FDI often seems feasible only for larger multinational corporations, today it is not. Because the competition to bring in innovative startups and SMBs is increasing, governments are quickly creating news ways to boost their attractiveness. If you can take the time to learn about and navigate the many incentives available to you, you might find it well worth your time.
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