Definition of Foreign Investment

DEFINITION OF FOREIGN INVESTMENT
Foreign investment refers to investments made by the residents of a

country in the financial assets and production processes of another
country. The effect of foreign investment, however, varies from
country to country. It can affect the factor productivity of the
recipient country and can also affect the balance of payments. Foreign
investment provides a channel through which countries can gain
access to foreign capital. Foreign investment involves capital flows
from one country to another, granting the foreign investors extensive
ownership stakes in domestic companies and assets. Foreign
investment denotes that foreigners have an active role in management
as a part of their investment or an equity stake large enough to enable
the foreign investor to influence business strategy. A modern trend
leans toward globalization, where multinational firms have
investments in a variety of countries. Foreign investment refers to the
investment in domestic companies and assets of another country by a
foreign investor. For instance, textile companies in particular, such as
retail production, many factories are located in China and Bangladesh
despite sales being focused on North America – such as H&M or Zara
– because material and labor are significantly cheaper there; thus,
outsourcing would result in higher profitability. In other cases, some
large corporations will prefer to conduct business in countries that
have lower tax rates.
How Foreign Investment Works

Foreign investment is largely seen as a catalyst for economic growth in
the future. Foreign investments can be made by individuals, but are most
often endeavors pursued by companies and corporations with substantial
assets looking to expand their reach.
As globalization increases, more and more companies have branches in

countries around the world. For some multinational corporations,
opening new manufacturing and production plants in a different country
is attractive because of the opportunities for cheaper production and
labor costs.
Additionally, these large corporations frequently look to do business

with those countries where they will pay the least amount of taxes. They
may do this by relocating their home office or parts of their business to a
country that is a tax haven or has favorable tax laws aimed at attracting
foreign investors.
Foreign investments can be classified in one of two ways

It can come in two forms:
 Foreign Direct Investment and;
 Foreign Indirect/Institutional investment (FII)
Foreign direct investments (FDI):

(FDIs) are the physical investments and purchases made by a company
in a foreign country, typically by opening plants and buying buildings,
machines, factories, and other equipment in the foreign country. These
types of investments find a far greater deal of favor, as they are
generally considered long-term investments and help bolster the foreign
country’s economy. Foreign direct investment involves in direct
production activities and is also of a medium to long-term nature.
Foreign direct investment (FDI) is an investment made by a company or
entity based in one country into a company or entity based in another
country. Therefore, they help boost the foreign country’s economy over
time.
Foreign institutional investments (FII):
Foreign indirect investments involve corporations, financial institutions,

and private investors buying stakes or positions in foreign companies
that trade on a foreign stock exchange. In general, this form of foreign
investment is less favorable, as the domestic company can easily sell off
their investment very quickly, sometimes within days of the purchase.
This type of investment is also sometimes referred to as a foreign
portfolio investment (FPI). Indirect investments include not only equity
instruments such as stocks, but also debt instruments such as bonds. But
foreign institutional investment is a short-term investment, mostly in the
financial markets. FII, given its short-term nature, can have bidirectional
causation with the returns of other domestic financial markets such as
money markets, stock markets, and foreign exchange markets. Hence,
understanding the determinants of FII is very important for any
emerging economy as FII exerts a larger impact on the domestic
financial markets in the short run and a real impact in the long run.
India, being a capital scarce country, has taken many measures to attract
foreign investment since the beginning of reforms in 1991.
Commercial Foreign Investments and Official Flows

Beyond direct and indirect foreign investments, commercial foreign
investments and official flows are two other types of investing
methodologies conducted internationally.
Commercial loans are essentially bank loans issued by a domestic bank

to a foreign business or government. Similarly, official flows are various
forms of development assistance that developing or developed countries
receive from a foreign country.
DETERMINANTS OF FDI
There are various factors that influence the FDI inflows into a country:
The investors consider and evaluate various aspects of a country before
investing in it. The relative importance of these determinants of FDI
varies not only between countries but also between different types of
FDI. Traditionally, the determinants of FDI include the following:
1. Size of the Market:
The developing countries possess substantial markets where the
consumers demand for certain goods far exceed the available supplies.
This demand potential is a big draw for many foreign enterprises. In
many cases, the establishment of a low cost marketing operation
represents the first step by a multinational company into the market of
the country. This establishes a presence in the market and provides
important insights into the ways of doing business and possible
opportunities in the country.
2. Political Stability:
In many countries, the institutions of government are still evolving and
there are unsettled political questions. Companies will generally be
unwilling to contribute large amounts of capital into an environment
where some of the basics political questions have not yet been resolved.
3. Macro-Economic Environment:
Instability in the level of prices and exchange rate enhance the level of
uncertainty, making business planning difficult. This increases the
perceived risk of making investments and therefore adversely affects the
inflow of FDI
4. Legal and Regulatory Framework:
The transition to a market economy entails the establishment of a legal
and regulatory framework that is compatible with private sector
activities and the operation of foreign owned companies. The relevant
areas in this field include protection of property rights, ability to
repatriate profits, and a free market for currency exchange. It is
important that these rules and their administrative procedures are
transparent and easily comprehensive.
5. Access to Basic Inputs:
Many developing countries have large reserves of skilled and semi-
skilled workers that are available for employment at wages significantly
lower than in developed countries. This provides an opportunity for
foreign firms to make investments in these countries to cater to the
export market. Availability of natural resources such as oil and gas,
minerals and forestry products also determine the extent of FDI.
REFERENCE
1. Mohan CN (2014) Unemployment in an Era of Jobless Growth.
2. Mohanty N (2013) The “Special Category State” Conundrum in Odisha.
3. Sen S (2013) Currency Concerns under Uncertainty: Case of China
4. Corporate finance institute resources knowledge-economics/foreign-investment © 2015 to

2021 CFI Education Inc.
Website:
2) https://www.omicsonline.org
3) https://www.sciencedirect.com
4) https://www.google.co.in
THANK YOU
MEMBERS:
KEMI, NANCY, AYOMIDE GRACE, WURA, LATEEF.

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DEFINITION OF FOREIGN INVESTMENT

Foreign investment refers to investments made by the residents of a

How Foreign Investment Works

As globalization increases, more and more companies have branches in

Additionally, these large corporations frequently look to do business

Foreign investments can be classified in one of two ways

Foreign direct investments (FDI):

Foreign institutional investments (FII):

Foreign indirect investments involve corporations, financial institutions,

Commercial Foreign Investments and Official Flows

Commercial loans are essentially bank loans issued by a domestic bank

1. Mohan CN (2014) Unemployment in an Era of Jobless Growth.

2. Mohanty N (2013) The “Special Category State” Conundrum in Odisha.

3. Sen S (2013) Currency Concerns under Uncertainty: Case of China

4. Corporate finance institute resources knowledge-economics/foreign-investment © 2015 to

KEMI, NANCY, AYOMIDE GRACE, WURA, LATEEF.

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