13. Foreign direct investment

Foreign direct investment may be divided into two components: portfolio investment, which is the purchase of stocks and bonds, and direct investment, by which the investors participate in the management of the firm in addition to receiving a return on their money.

Foreign direct investment (FDI) is a complex form of international business. It involves ownership and control of a company in a foreign country by an organization based in another country.

Contrary to portfolio investments, foreign direct investments mean a long-term commitment where capital funds will be tied up for a long time.

Although a direct investment usually is required by transferring capital from one country to another, capital is not the only contribution made by the investor or the only means of gaining equity. The investment firm may supply technology, personnel and markets in exchange for an investment for an interest in a firm located abroad.

Companies engage in direct investment abroad for the same reasons they pursue international trade:

1. To expand markets by selling abroad.

2. To acquire foreign resources (e.g. raw materials, production efficiency and knowledge)

Financial considerations are also the most important and sometimes decisive factors. What is the expected return on an investment? What are interest rates? What are the sources of working capital?

When governments are involved in direct investment, an additional motive may be to attain some political advantage.

One more explanation for a direct investment is that investors perceive a monopoly advantage over similar companies in the countries to which they go. The advantage is due to the ownership of some resource that is unavailable at the same price or terms to the local firm. The resource may be in the form of assets to markets, patents, management skills, or the like.

In many countries there is resistance to foreign direct investment.

Some strategic industries (such as food, computers, nuclear reactors and energy) will find it increasingly difficult to expand abroad. But direct investment is likely to continue its course in many areas. The economic integration of the US, Europe and Japan will stimulate its development. Because of the greater costs of transferring resources abroad and the greater risk of operating in a different environment, the firm will not move unless it expects a higher return than at home.

Comprehension:

1. Name two components of foreign direct investment.

2. What is the main difference between portfolio investments and direct investment?

3. Say if the following statement is true or false according to the text: “Financial considerations are one of the most important reasons for investors”.

4. Do investors perceive a monopoly advantage over similar companies in the countries they go to?

5. Why is there resistance to foreign investment in some countries?