What is foreign direct investment. Let's explain in simple words

Direct investment is contrasted with portfolio investment - the purchase of securities without the intention of gaining control of the enterprise.

The Central Bank of the Russian Federation understands direct investment as investments when a foreign investor (state and private organizations, individuals and legal entities or their associations) owns 10% or more in the capital of a Russian company.

Similarly, the U.S. Department of Commerce considers an investment to be direct when any foreign entity controls at least a 10% interest in the U.S. firm.

Countries, as a rule, struggle to attract foreign investment, since their influx leads to an increase in the country's GDP - expansion of production, renewal of outdated fixed assets and access to advanced foreign technologies. The FDI indicator reflects the level of development of countries and regions, as well as the degree of interest of foreign investors in doing business in a particular state.

As a rule, the sources of FDI are companies from developed countries. The main exporters of capital in the direct investment format are large transnational companies. They invest in production, construction of new factories and branches of foreign companies, as well as in the acquisition of existing enterprises through the purchase of stakes.

Direct Investments and Liquidity

Unlike portfolio investments, exiting a project for investors is associated with certain difficulties. If we are talking about shares of an open joint-stock company, then within the framework of direct investment the package is usually so large that it cannot be sold quickly without a very significant impact on stock exchange quotes.

When it comes to direct investments in private joint-stock companies or limited liability companies, finding an investor who wants to enter the business often turns out to be problematic. Thus, direct investments generally lack liquidity.

The best option for private equity investors in a company is to eventually take it public, turning their stakes into publicly traded shares. If this succeeds, then they receive maximum profit. Actually, in the modern financial world, this is why they engage in direct investments.

What is investment?

Investment is the investment of money (securities, enterprises, etc.) in order to obtain funds. It can be:

• deposits in banking institutions;
• shares;
• securities;
• equipment;
• lending;
• intellectual property;
• entrepreneurial projects.

The company can invest money in sectors such as industry, transport, and agriculture.

Crowdfunding as an alternative way to attract investment in business activities

Private equity funds

Direct investments are associated with increased risks. If there are mistakes in choosing projects, getting out is not so easy, if not impossible. The only way to protect your funds is to invest in a large number of different start-up companies, which is unlikely to be possible for individual investors, even the wealthiest ones.

But such activities are quite suitable for special funds. They collect funds from many people, accumulate money and invest it in startups and existing companies. At the same time, it is generally accepted that up to 70 percent of projects turn out to be unprofitable, but the remaining 30 percent pay for everything else.

Such funds are usually called venture funds, or private equity funds, as you prefer.

Nuances

An example of the positive impact of foreign direct investment: Saudi Arabia's policy to diversify its oil and gas income has led to a significant increase in FDI in manufacturing, infrastructure and services.

At the same time, there are also negative effects:

• deterioration of the balance of payments due to repatriation of profits;
• infringement of local producers;
• the arrival of “dirty industries” in the country;
• foreign companies can move low-skilled and low-paid jobs abroad, while keeping more skilled and higher-paid ones at home.

Data

• According to Ernst&Young (EY) estimates, in 2022 foreign investors invested in 141 projects in Russia (11th place in the list of the 20 most attractive countries for investment in Europe).
• In 2022, compared to 2019 (191 projects), the volume of FDI in the Russian Federation decreased by 4 times due to the pandemic, the high base of previous years and sanctions risks against the Russian Federation (the country’s geopolitical risk index in 2022 was 126 points, which is 11% higher than the average for the previous 10 years).
• The three leading countries that most actively invested in the Russian economy in 2022: Germany (26 projects), China and the USA (15 each), and Italy (13). More than half of American companies, like German businesses, have invested in the agri-food sector.
• Manufacturing is the most attractive sector for foreign investment in Russia (107 projects). Thanks to import substitution and the food embargo, the leader in terms of foreign investment is the agri-food sector (42).
• The regions most in demand among foreign investors are Moscow and the Moscow region (41 projects), St. Petersburg and the Leningrad region (16) and Tatarstan (10).

Problem

There are several negative features hidden behind FDI indicators in Russia:

• The offshore (i.e. Russian) origin of a significant share of the investments entering the country (in particular, the “circulation of capital” - a scheme in which local money moves abroad and then returns to the domestic economy in the form of direct investment).
• Extremely uneven distribution of investments between individual regions of the country.
• High industry volatility.

According to estimates by Russian Academy of Sciences economist Boris Kheifets, before the introduction of Western sanctions in the mid-2010s and the start of the state de-offshorization campaign, from 60% to 80% of foreign direct investment in Russia accounted for offshore companies (for example, the British Virgin Islands), where they had previously been sent from Russia. At the end of 2016, the Russian Federation entered the top five countries that are the largest investors in offshore zones, wrote RANEPA economists. Despite the fact that since 2014, the flow of FDI into the Russian economy from offshore zones has decreased significantly, the offshore sector still constitutes a significant part of it. Approximately half of Russia's investment exchange occurs in offshore zones.

The wide spread of offshore schemes may indicate unsatisfactory business conditions, forcing entrepreneurs to register their companies in offshore zones in order to minimize taxes, etc. Experts directly point out that the offshorization of the Russian economy negatively affects the state of its investment climate.

In pursuit of an investor

To attract investments on a completely different scale, for example, to launch large-scale production, investment strategies and attractive conditions are created: taxes are reduced, bureaucratic procedures are simplified, infrastructure is developed, and demand for products is stimulated.

We can say that regions and cities compete with each other, creating an attractive investment climate in order to interest more promising investors and attract large capital to their region.

For residents, investment in the economy is very profitable. In cities that attract more investment, the number of jobs increases, the standard of living rises, and the social sphere develops.

Become a resident

For investors who want to develop business in Russia, special economic zones (SEZs) are created - infrastructure sites with their own internal ecosystem. A striking example is the SEZ Technopolis Moscow. Russian and foreign high-tech enterprises operate on its territory, and the city provides residents with tax preferences, trains personnel, and builds engineering and production infrastructure.

The Moscow technopolis has already provided the capital with almost 11 thousand jobs and tax revenues for the budget. Over the nine months of 2022, residents of the special economic zone invested 7.4 billion rubles in the development of the capital’s economy. Now the total volume of all investments by residents over the entire existence of the SEZ has already exceeded 36 billion rubles.

How to become a resident of the special economic zone “Technopolis Moscow” Cheesecakes, sausages and a pool with nuclear fuel. What else do robots from the Moscow technopolis work with?

Results

Capital investments are a type of investment in which material assets are created in the form of buildings, structures, and other fixed assets, including the results of design and survey work.
In accounting, capital investments are reflected on account. 08 “Investments in non-current assets”. In the balance sheet, capital investments are included in line 1150 as part of the enterprise's fixed assets, and if the amount is significant, they are highlighted as a separate line. You can find more complete information on the topic in ConsultantPlus. Free trial access to the system for 2 days.

Investment instruments

Any purchase made in order to generate income in the future can be called an investment instrument. This is the purchase of real estate, equipment for the production of goods, or even the cost of additional education, which will provide new knowledge and improve skills. Financial investment instruments include the purchase of currencies, metals, stocks, bonds, real estate, as well as traditional bank deposits.

Borrow money

By purchasing shares, an investor allocates his money to the development of the company in the hope that it will increase its financial performance. Shares give their owner the right to receive dividends. When buying bonds, the investor lends funds at a certain interest rate and waits for the borrower to return the money to him, taking into account the income received.

By investing his capital in a business, the investor expects to receive a return - profit. Therefore, he evaluates the company’s activities before financially supporting a particular project. In turn, entrepreneurs who plan to attract investment write detailed business plans. They not only predict how the business will grow thanks to the invested funds, but also try to calculate how much the investor's profit will increase.

Contribution of a cup of coffee to the country's economy

With investors' money, the owner of a small coffee shop can buy an additional coffee machine. He will be able to brew and sell more coffee. This will increase overall sales for the business. In combination with the activities of many other organizations, increased production can lead to an increase in the gross domestic product of both the region (GRP) and the entire country (GDP). Using this indicator, they evaluate the situation in the economy and learn about the standard of living of a country or region.

Domestic and regional: what is gross product and why is it considered? What are economic growth rates and what are they?

Difference between investments and capital investments

The Law “On Investment Activities...” dated February 25, 1999 No. 39-FZ (hereinafter referred to as Law No. 39-FZ) in the preamble defines investments and capital investments.
According to the definition, the concept of “investment” is broader. Investments mean investments of funds or assets that are equivalent to funds, including property rights and rights with a monetary value, in business objects or other activities. Investments are made for the purpose of obtaining profit or a beneficial effect (paragraph 2 of article 1 of law No. 39-FZ). Capex is a type of investment. In this case, the investment of money (or other assets) is made in fixed assets (fixed capital), including design and survey work (paragraph 4 of article 1 of law No. 39-FZ).

Thus, the difference between capital investments and investments is that capital investments are a special case of investment, limited to investments in fixed assets.

Order of the Ministry of Finance of Russia dated October 24, 2008 No. 116n approved PBU 2/2008 “Accounting for construction contracts,” which apply to contractors. In this case, construction contracts must have a performance period of more than a year or a performance period that affects different reporting periods. At the same time, “construction of facilities” (which is the subject of PBU 2/2008) is directly related to capital investments. What is a “construction object” for a contractor is an object of capital investment for the customer.

In accounting for investments in the form of capital investments from construction customers (until the moment fixed assets are put into operation), it is necessary to be guided by the provisions governing the formation of non-current assets (account 08). After putting the asset into operation, they are guided by the provisions for accounting for fixed assets (PBU 6/01).

IMPORTANT! From 01/01/2022, 2 new FSBUs are mandatory: 6/2020 “Fixed Assets” and 26/2020 “Capital Investments”. It is possible to apply the provisions of the new standards earlier by consolidating such a decision in the accounting policies of the enterprise. PBU 6/01 will no longer be in force.

ConsultantPlus experts spoke in more detail about the changes that need to be taken into account when applying new standards. Get free demo access and go to the review material to find out all the nuances of the innovations.

In practice, accountants make quite a lot of mistakes when assessing the value of fixed assets. The article “Guidelines for accounting of fixed assets” will help you study this issue.

Sources of financing, market development and direct results of investments

Sources of financing for direct investment depend on the company’s operating conditions and the dynamics of its development. It can be:

• own funds or reserves within the enterprise (if it is a legal entity);
• borrowed money;
• raising profits from the issue of securities, share contributions;
• off-budget funds;
• foreign investors.

Sources of investment are closely related to financial and credit relations that arise between other participants in this process. Another equally important source is profit from core activities. The use of foreign deposits contributes to the development of international economic relations.

The emergence of the direct investment market had the greatest impact on the development of free trade, competition and stability in the economy. Under such conditions, investments help countries receive all the benefits of global economic integration.

In addition, not only finances are invested in the company, but also the knowledge, experience, and connections of the investor, because he has a stake in the enterprise and contributes to its development. The direct results of such investments are the development of the country’s economy, increased employment, and reduction of social problems. The development of advanced industries and international trade flows are also being stimulated.

Investment activities in the form of capital investments

Law No. 39-FZ establishes that the object of investment in the form of capital investments can be newly created property, as well as property being modernized and belonging to any type of property: state, municipal, private, public.

Subjects of investment in the form of capital investments are:

• investors (including foreign);
• customers;
• contractors,
• users of capital investment objects.

The law does not prohibit subjects of investment relations from combining roles. Thus, an enterprise can be an investor, a customer, and a contractor at the same time. In practice, it is very common to combine the roles of investor and customer. In the case of a general contract, the general contractor acts as a customer (for the contractors he attracts) and as a contractor - in front of the customer and construction investor.

Today, the state influences investment activity in the form of capital investments indirectly, changing taxes, introducing benefits or, conversely, additional taxation, reducing or increasing the level of technical control in certain sectors of construction.

Participants in the construction market, namely where investments are made in the form of capital investments, acting as contractors, organize independent control of the quality of construction. Responsibility for the buildings and structures being erected, for their compliance with technical requirements and standards today lies entirely with contractors, unless it is proven that the fault for violating technical requirements lies with the other party (investor, customer).

You can learn more about how to correctly reflect capital investments in non-current assets in accounting from the article “Rules for keeping records of investments in non-current assets.”

What is direct investment and who is a direct investor?

Direct investing is the purchase of shares in a company and participation in its management. A direct investor is a person who receives income from such investments. The peculiarity of such investments is their long-term nature, as well as the ability to influence the development of the enterprise.

Companies that receive direct investment meet a number of criteria:

• They have growth potential. Otherwise, there will be no prospect of investing in their development.
• They belong to an innovative and promising industry. It’s good when the product or service is original, since there are no analogues on the market yet and there will be little competition.
• They have a business plan with a detailed description of all actions and goals.

An investor can invest in a company only if all parties to the transaction agree on its development. Everyone should be interested in increasing the value of the enterprise, otherwise it will turn out that one works, the second simply receives passive income.

Capital investments on balance sheet

When compiling a balance sheet, enterprises, as a rule, do not allocate construction in progress as a separate line, which largely reflects the state of capital investments in the process of investment construction. But provided that construction in progress constitutes a significant part of the assets, the enterprise can show this asset as a separate line on the balance sheet (clause 6 of PBU 4/99).

Line 1150 “Fixed assets” summarizes data on land plots, environmental management facilities, buildings, machinery and equipment, other fixed assets and construction in progress. The status of capital investments can be calculated by comparing the amount on line 1150 at the beginning of the period with the amount on this line at the end of the period.

How to fill out line 1150 “Fixed assets” in the balance sheet, read in ConsultantPlus. If you do not have access to the K+ system, get a trial demo access. It's free.

You can learn more about the rules for preparing a balance sheet for enterprises using the simplified tax system in the article “How to fill out a balance sheet using the simplified tax system?”