What Is an Outward Direct Investment (ODI)?
Let me explain what an outward direct investment (ODI) is—it's a business strategy where a domestic firm expands its operations into a foreign country.
You should know that ODI can take various forms depending on the company. For instance, some firms opt for a green field investment, which means a parent company sets up a new subsidiary in a foreign country. Mergers or acquisitions in foreign markets also count as ODI. Additionally, a company might choose to expand an existing foreign facility as part of this strategy. If you're running a firm and your domestic market is saturated, turning to ODI makes sense when better opportunities exist abroad.
ODI is also referred to as outward foreign direct investment or direct investment abroad. It stands in contrast to foreign direct investment (FDI), which flows in the opposite direction.
Key Takeaways
- An outward direct investment (ODI) is a business strategy in which a domestic firm expands its operations to a foreign country.
- Employing outward direct investment (ODI) is a natural progression for firms if their domestic markets become saturated and better business opportunities are available abroad.
- American, European, and Japanese firms have long made extensive investments outside their domestic markets.
- China has emerged as a large ODI player in recent years.
Understanding Outward Direct Investment (ODI)
The level of a nation's outward direct investment serves as an indicator that its economy is mature. ODI has been demonstrated to boost a country's investment competitiveness and is essential for long-term, sustainable growth. Take American, European, and Japanese firms—they've been investing heavily outside their home markets for a long time.
Because of their faster growth rates, emerging market economies often attract significant ODI, just as China has over the past two decades. According to the International Monetary Fund, the top five countries for ODI include the United States, the Netherlands, Luxembourg, China, and the United Kingdom. Even some emerging market countries are starting to invest abroad themselves.
ODI and China
In 2015, Chinese overseas investment surpassed foreign direct investment (FDI) into China for the first time. By 2016, China's ODI reached its peak, with companies investing over $180 billion overseas. From 2017 onward, ODI entered a downtrend that persists. In 2018, China's FDI inflows exceeded its ODI again, positioning the country as a net debtor once more. In 2020, China’s ODI rose to nearly $154 billion, up from about $137 billion in 2019.
Most of China's ODI flows into leasing and business services, wholesale, retail, and IT sectors. Starting in 2016, Beijing implemented tighter capital controls, leading to the scaling back of many overseas projects. These measures aimed to prevent capital flight, where assets or money quickly exit the country. Meanwhile, China's domestic economic slowdown, largely from the ongoing U.S. trade war effects, has also curbed ODI.
With sluggish domestic growth, investing in foreign assets has become less attractive. In the past, Chinese firms' foreign investments significantly influenced global asset prices, especially through property sales and mergers and acquisitions.
ODI vs. FDI
You need to distinguish between outward direct investment (ODI) and foreign direct investment (FDI). FDI happens when a non-resident invests in the shares of a resident company. In contrast, ODI occurs when a resident company invests in a non-resident country to expand its business.
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