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What is foreign investment?

What is foreign investment?

Foreign investment is the act of an individual or corporation, or institutional investor, acquiring a large stake in a company, which may be a controlling or non-controlling interest.

When it is a controlling interest, it is known as Foreign Direct Investment (FDI). Foreign corporate expansion in terms of newly acquired domestic facilities and equity interest in domestic companies tends to be monitored by domestic governments.

There are a few ways that a company can enter foreign markets: exporting, licensing agreements with companies in other countries for distribution (and client acquisition), joint ventures with domestic corporations, non-controlling interest in domestic corporations (foreign portfolio investment), and what’s called foreign direct investment, in which wholly owned subsidiaries are established either through the launch of new ventures or by establishing controlling interest in an already-established company in the new market.

Non-controlling interests, which, again are often called foreign portfolio investments (or FPI), which tend to be categorized as an interest of less than 10% of a corporation, are monitored by domestic governments, and their aggregate cash flows are referred to as portfolio flows, in which equity interests from one country are surrendered for equity interests in other countries. If a country has positive portfolio flow, this can be seen as a good thing.

Some countries have restrictions which entirely prevent foreign direct investment, and the other options may be the only ones available to a company. Other countries might allow FDI but will only allow it with what are known as performance requirements. Performance requirements are put in place to attempt to offset any potential negative effects of the foreign investment and to maximize the positive impact on the country’s economy.

Examples of requirements might include stipulations about the number of domestic workers that must be hired, the minimum or maximum amount of importing or exporting that must be done by the company, requirements for transfer of technology (ToT), and so on. It is more likely that an emerging market country will feel entitled to ask for performance requirements.

Foreign Direct Investment can be seen as free market capitalism, particularly when not encumbered by performance requirements, but research suggests that in many cases it is not efficient or especially beneficial for the developing economy, so there is some debate about how to allow large companies to operate across borders without barring market entry and draining the country of talent and resources, among other problems. In plenty of cases, FDI is healthy and beneficial.

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Keywords: alternative investments, diversifiable risk, Foreign Direct Investment (FDI), Foreign Portfolio Investment (FPI), Transfer of Technology (ToT), foreign investors, Diversification Score®,