What is Foreign Investment?

What is Foreign Investment?

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.

Introduction of Foreign Investments

Foreign investments are often made by larger financial institutions hoping to diversify their portfolio or expand operations for one of their current companies internationally. It is often considered a move for scaling purposes or a catalyst to spur in economic growth.

For example, some companies may expand their offices worldwide to reach global talent and connections. Examples would include Goldman Sachs, J.P. Morgan, Morgan Stanley, and other large corporations. In other cases, some companies may open facilities or operations to capitalize on cheaper labor or production costs offered in specific countries.

For textile companies in particular, such as retail production, many factories are located in China and Bangladesh despite sales being focussed 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.

See also :  What is Environmental Economics?

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.

Other Types of Foreign Investment

There are two additional types of foreign investments to be considered: commercial loans and official flows. Commercial loans are typically in the form of bank loans that are issued by a domestic bank to businesses in foreign countries or the governments of those countries. Official flows is a general term that refers to different forms of developmental assistance that developed or developing nations are given by a domestic country.

Commercial loans, up until the 1980s, were the largest source of foreign investment throughout developing countries and emerging markets. Following this period, commercial loan investments plateaued, and direct investments and portfolio investments increased significantly around the globe.