foreign investment

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Related to foreign investment: foreign direct investment

Foreign Direct Investment

A major investment by a foreign corporation. A common example of foreign direct investment is a situation in which a foreign company comes into a country to build or buy a factory. Many economists believe that foreign direct investment is good for an economy, as it provides jobs and increases domestic capital. Critics point out that profits from foreign direct investment usually leave the country and go to the foreign company. Encouraging foreign direct investment is a major part of some IMF restructuring programs.

foreign investment

the purchase of overseas physical and financial assets. Overseas investment in financial assets, in particular by institutional investors, is undertaken primarily to diversify portfolio risk and to obtain higher returns than would be achievable on comparable domestic investments; while physical investment abroad is one main way for a firm to internationalize its operations. FOREIGN DIRECT INVESTMENT (FDI) in new manufacturing plants and sales subsidiaries, or the acquisition of established businesses, provide the firm with a more flexible approach to supplying foreign markets. See CAPITAL INFLOW,CAPITAL OUTFLOW, FOREIGN MARKET SERVICING STRATEGY, MULTINATIONAL ENTERPRISE.
Foreign investmentsclick for a larger image
Fig. 76 Foreign investments. Outward and inward FDI flows by leading countries, 2000–03. Source: Balance of Payment Statistics, IMF 2004.

foreign investment

the INVESTMENT by a country's domestic citizens and businesses and the government in the purchase of overseas FINANCIAL SECURITIES and physical assets - FOREIGN DIRECT INVESTMENT (FDI). Foreign investment in financial assets (PORTFOLIO investment), in particular by institutional investors such as unit trusts and pension funds, is undertaken primarily to diversify risk and to obtain higher returns than would be achieved on comparable domestic investments. Foreign direct investment in new manufacturing plants and sales subsidiaries (GREENFIELD INVESTMENT) or the acquisition of established overseas businesses is undertaken by MULTINATIONAL COMPANIES (MNCs). See CAPITAL MOVEMENT.

International investment has long complemented INTERNATIONAL TRADE as a resource allocation and transfer mechanism, but in recent decades it has become significantly more important with the expansion of MNCs. A multinational company is a business incorporated in one country (the home or source country) that owns income-generating assets - plants, offices, etc. - in some other country or countries (host countries). The propensity of many MNCs to use a combination of importing/exporting, strategic alliances with foreign partners and wholly owned FDI to source inputs for their operations and to produce and market their products has led to a more complex pattern of world trade and investment. Thus, for example, some international trade flows involving arm's-length exporting and importing between different firms have been ‘INTERNALIZED’ and are now conducted through intra-subsidiary transfers within a vertically integrated MNC. In some cases exporting to a particular market by a MNC has been replaced by the establishment of a local production plant to meet that demand locally; in other cases trade has been expanded by the establishment of a foreign plant that is then used as an export base to supply adjacent markets. Thus, trade and investment relations between countries need to be looked at as an interrelated, dynamic process rather than an either/or situation (see FOREIGN MARKET SERVICING STRATEGY).

FDI by firms is undertaken to achieve COMPETITIVE ADVANTAGES - lower costs and prices, improved marketing reach and effectiveness (see FOREIGN MARKET SERVICING STRATEGY). In addition to these micro economic considerations, the macroeconomic effects on the domestic economy can be substantial. Inward investment by foreign-owned companies can ‘top up’ an inadequate level of domestic savings and investment, create new jobs and, through ‘technology transfer’, serve to upgrade the country's economic capabilities by introducing new industrial processes and products and imparting new skills and practices. On the debit side, fears are often raised relating to the loss of national sovereignty if foreign companies come to dominate key domestic industries and the damaging effects of a reversal of foreign capital inflows. This said, the impact of FDI inflows on the UK economy, for example, has been considerable. In 2003/04 foreign-owned companies accounted for under 1% of all manufacturing firms, but because of the typical large-scale nature of their operations, they accounted for 17% of the UK labour force, 26% of total UK output and 33% of total UK investment. (Source: Business Monitor, PA1002,2005).

In addition to the effects of FDI on the ‘real’ economy, there is also a financial effect on a country's BALANCE OF PAYMENTS. The initial ‘one-off outflow/inflow of foreign exchange required to pay for the investment shows up as a capital account transaction, while subsequent annual income flows in the form of profits, dividends and interest appear as receipts or debits in the ‘invisibles’ component of the current account. Over the three-year period 2000–03, FDI flows totalled US $2.6 billion.

Fig. 76 lists the leading countries in outward FDI flows and the leading countries in inward FDI flows for 2000–03. It will be noted that the UK is a major overseas investor and the leading European country for inward investment. See INVEST UK.

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