Balance of payments accountants define FDI as any flow of lending to, or purchased of ownership in, a foreign enterprise that is largely owned by residents of the investing country (the definition largely vary from country to country). For the United States FDI occurs when a person, organisation, or firm take a 10 percent or more interest in a foreign firm. (International Economics, page 628). The moment a firm engage in FDI, it becomes a multinational enterprise (MNE).
.
Why do firms become multinationals?.
In fact, FDI is so much more than just a capital movement, in several cases no financial capital is transferred from the parent company, located in the home country to the host nation. The purpose of FDI is not manly to allocate capital around the globe, but more importantly to move the firm's intangible assets: technology, marketing skills, managerial capabilities and assets. .
Strategic motives drive the decision to invest abroad. Firms seek new markets for their products, procurement of inputs (raw materials, components, natural resources, etc) from cheapest possible source, low cost and highly skilled labor. The cost and skills of labor varies from country to country. Since labor is not international mobile, many firms choose to locate their firm where the cost and skills of local labor suits their firm best. Foreign investors are finding themselves more and more pressured to reduce the costs and improve the quality of their products, and increase the firm's production efficiency, which are considered essential to preserve or advance their competitiveness.