What is foreign investment and what are its types?
Posted: Mon Dec 23, 2024 5:23 am
International business is directly influenced by various factors, one of them being foreign investment. Learn what it is, why it is important and the types that exist, as well as the most significant advantages and disadvantages.
Foreign investment is a complex phenomenon that can have a significant impact on the economy. Its growing relevance in the global context has played a fundamental role in shaping international business in recent decades. This is because investment opportunities cross national boundaries, so it is essential to understand how foreign capital impacts business strategies and international economic well-being.
What is foreign investment?
It is considered as the flow of capital that is carried out in a country by people or companies from another nation, with the objective of creating, acquiring or participating in a company or a project . Foreign investment can have benefits and risks for both the issuing and receiving country, related to economic, social, environmental and political development.
Dussel Peters states in his book Foreign Investment in Mexico (2000) that foreign investment is "the placement of long-term capital in a foreign country, for the creation of agricultural, industrial and service companies, with the purpose of internationalizing capital and industrial goods." In addition, foreign investment can be equity capital, debt capital or venture capital .
In this sense, foreign investment can be carried out in different ways, including the creation of a new company in the host country, the acquisition of an existing company or the expansion of an organization . It can be affected by factors such as economic growth, inflation and interest rates. Political and cultural factors also intervene in this process, which directly influence business.
What is its importance?
Foreign investment is a valuable tool for companies looking to expand into new markets. Foreign investment is therefore very important because it can provide access to new customers, suppliers and resources, as well as diversify the portfolio and reduce its risk. It can also have a positive impact on the global economy, helping businesses reduce their dependence on domestic markets.
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Types of foreign investment
The types of foreign investment represent the different ways cp numbers in which an investor can place his or her capital, to obtain a profit or to exercise control over a company or project. In this sense, this investment can be direct, indirect or portfolio, depending on the degree of influence that the investor has over the receiving entity, as detailed below:
Foreign Direct Investment (FDI)
An investment made by an organization or person from one country in another, with the purpose of establishing or acquiring a company or a significant shareholding. It implies control, participation or lasting influence in the management and decisions of the receiving company.
Example: Japanese automaker Toyota decides to build a new manufacturing plant in Brazil. Toyota invests in infrastructure, machinery and local employees, directly contributing to the country's economic development. This investment includes not only financial capital, but also the transfer of technology and skills.
Foreign indirect investment (FDI)
This is an investment in a foreign country that is made through loans, leases, licenses, franchises or management contracts, among others. It does not imply having control or influence over the decisions of the receiving company, but rather depends on the profits it generates.
Example: A European investment fund buys Argentine government bonds. Although these funds are providing capital to the country, they are not directly influencing the day-to-day operations of specific companies, or the government's economic decision-making, but rather they hope to earn returns through the interest generated.
Foreign Portfolio Investment (FPI)
It is the investment in a foreign country through the purchase of shares, mutual funds or bonds of foreign companies or entities with the objective of obtaining a short-term financial gain. It seeks to receive a financial return through the payment of dividends or interest on the capital invested.
Example: An American investor buys shares in a Mexican telecommunications company. This investment allows the investor to diversify his or her portfolio and benefit from potential returns, but it does not grant the investor decision-making power over the company, nor does it imply a transfer of technology or specific knowledge.
Foreign investment is a complex phenomenon that can have a significant impact on the economy. Its growing relevance in the global context has played a fundamental role in shaping international business in recent decades. This is because investment opportunities cross national boundaries, so it is essential to understand how foreign capital impacts business strategies and international economic well-being.
What is foreign investment?
It is considered as the flow of capital that is carried out in a country by people or companies from another nation, with the objective of creating, acquiring or participating in a company or a project . Foreign investment can have benefits and risks for both the issuing and receiving country, related to economic, social, environmental and political development.
Dussel Peters states in his book Foreign Investment in Mexico (2000) that foreign investment is "the placement of long-term capital in a foreign country, for the creation of agricultural, industrial and service companies, with the purpose of internationalizing capital and industrial goods." In addition, foreign investment can be equity capital, debt capital or venture capital .
In this sense, foreign investment can be carried out in different ways, including the creation of a new company in the host country, the acquisition of an existing company or the expansion of an organization . It can be affected by factors such as economic growth, inflation and interest rates. Political and cultural factors also intervene in this process, which directly influence business.
What is its importance?
Foreign investment is a valuable tool for companies looking to expand into new markets. Foreign investment is therefore very important because it can provide access to new customers, suppliers and resources, as well as diversify the portfolio and reduce its risk. It can also have a positive impact on the global economy, helping businesses reduce their dependence on domestic markets.
You may be interested in knowing: What are the types of international negotiation?
Types of foreign investment
The types of foreign investment represent the different ways cp numbers in which an investor can place his or her capital, to obtain a profit or to exercise control over a company or project. In this sense, this investment can be direct, indirect or portfolio, depending on the degree of influence that the investor has over the receiving entity, as detailed below:
Foreign Direct Investment (FDI)
An investment made by an organization or person from one country in another, with the purpose of establishing or acquiring a company or a significant shareholding. It implies control, participation or lasting influence in the management and decisions of the receiving company.
Example: Japanese automaker Toyota decides to build a new manufacturing plant in Brazil. Toyota invests in infrastructure, machinery and local employees, directly contributing to the country's economic development. This investment includes not only financial capital, but also the transfer of technology and skills.
Foreign indirect investment (FDI)
This is an investment in a foreign country that is made through loans, leases, licenses, franchises or management contracts, among others. It does not imply having control or influence over the decisions of the receiving company, but rather depends on the profits it generates.
Example: A European investment fund buys Argentine government bonds. Although these funds are providing capital to the country, they are not directly influencing the day-to-day operations of specific companies, or the government's economic decision-making, but rather they hope to earn returns through the interest generated.
Foreign Portfolio Investment (FPI)
It is the investment in a foreign country through the purchase of shares, mutual funds or bonds of foreign companies or entities with the objective of obtaining a short-term financial gain. It seeks to receive a financial return through the payment of dividends or interest on the capital invested.
Example: An American investor buys shares in a Mexican telecommunications company. This investment allows the investor to diversify his or her portfolio and benefit from potential returns, but it does not grant the investor decision-making power over the company, nor does it imply a transfer of technology or specific knowledge.