What is outward direct investment (ODI)?
An outbound direct investment (ODI) is a business strategy in which a domestic company extends its operations to a foreign country.
ODI can take many different forms depending on the company. For example, some companies will make a green zone investment, i.e. when a parent company sets up a subsidiary in a foreign country. A merger or acquisition can also take place in a foreign country (and can therefore be considered an outward direct investment). Finally, a company may decide to expand an existing foreign facility as part of an ODI strategy. Using ODI is a natural progression for companies if their domestic markets become saturated and better business opportunities are available overseas.
Key points to remember
- An outbound direct investment (ODI) is a business strategy in which a domestic company extends its operations to a foreign country.
- Outward direct investment (ODI) is a natural progression for companies if their domestic markets become saturated and better business opportunities are available abroad.
- American, European and Japanese companies have long made significant investments outside their home markets.
ODI is also referred to as outward foreign direct investment or outward direct investment.
Understanding Outbound Direct Investment (ODI)
The extent of a country’s foreign direct investment can be taken 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 companies, for example, have long made significant investments outside their home markets.
Due to their faster growth rates, emerging market economies often receive large amounts of ODI, as China has over 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 countries have started to invest abroad.
In 2015, Chinese outward investment exceeded foreign direct investment (IDE) in China for the very first time. In 2016, China’s ODI peaked: Chinese companies invested more than $180 billion overseas. From 2017, the ODI began a downward trend which has continued. In 2018, China’s foreign direct investment (FDI) inflow once again exceeded its ODI (making the country once again a net debtor).
It is important to distinguish between outward direct investment (ODI) and foreign direct investment (FDI). An FDI occurs when a non-resident invests in the shares of a resident company. ODI occurs when a resident company invests in a wholly-owned subsidiary or joint venture in a non-resident country as part of a strategy to expand its business.
In 2020, China’s ODI increased to $258 billion from $219 billion in 2019. The majority of China’s ODIs are entries in leasing and business services, wholesale, retail and information technology. From 2016, Beijing began to tighten its capital controls. As a result, many overseas Chinese projects have been scaled back. These restrictive measures were intended to curb capital flight— when assets or money move rapidly out of a country. At the same time, the domestic economic slowdown in China, mainly due to the lingering effects of the trade war with the United States, has also hampered the Chinese ODI. Due to sluggish domestic growth, investment in foreign assets has become less attractive. Previously, foreign investment by Chinese companies was an important driver of global asset prices, mainly due to the sale of properties and mergers and acquisitions.
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