Foreign direct investment

Examples of Foreign direct investment in the following topics:

• Direct Investment

  • Intel is headquartered in the United States, but it has made foreign direct investments in a number of Southeast Asian countries where they produce components of their products in Intel-owned factories.
  • Foreign direct investment (FDI) is investment into production in a country by a company located in another country, either by buying a company in the target country or by expanding operations of an existing business in that country.
  • However, identifying the conditions that best attract such investment flow is difficult, since foreign investment varies greatly across countries and over time.
  • Sao Paulo, Brazil, home to a growing middle class and significant direct investments.
  • Explain the effects of foreign direct investment (FDI) for the investor and the host country

• The Financial Account

  • The financial account has four components: foreign direct investment, portfolio investment, other investment, and reserve account flows.
  • Foreign direct investment (FDI) refers to long term capital investment such as the purchase or construction of machinery, buildings, or even whole manufacturing plants.
  • If a nation's citizens are investing in foreign countries, there is an outbound flow that will count as a deficit.
  • After the initial investment, any yearly profits not re-invested will flow in the opposite direction, but will be recorded in the current account rather than the financial account .
  • Austria has experienced a surplus of foreign direct investment: more foreign investors invest in Austria than Austrian investors do in the rest of the world.

• Elements of economic globalization

  • The growth in cross-border economic activities takes five principal forms: (1) international trade; (2) foreign direct investment; (3) capital market flows; (4) migration (movement of labor); and (5) diffusion of technology (Stiglitz, 2003).
  • Foreign Direct Investment (FDI): According to the United Nations, FDI is defined as "investment made to acquire lasting interest in enterprises operating outside of the economy of the investor".
  • Direct investment in constructing production facilities, is distinguished from portfolio investment, which can take the form of short-term capital flows (e.g. loans), or long-term capital flows (e.g. bonds) (Stiglitz, 2003).
  • Since 1980, global flows of foreign direct investment have more than doubled relative to GDP (World Briefing Paper, 2001).
  • Capital market flows: In many countries, particularly in the developed world, investors have increasingly diversified their portfolios to include foreign financial assets, such as international bonds, stocks or mutual funds, and borrowers have increasingly turned to foreign sources of funds (World Briefing, Paper, 2001).

• The Balance of Payments

  • Sources of funds include exports, the receipt of loans or investment, and income from foreign assets.
  • Whenever a country has an outflow of funds, such as when the country imports goods and services or when it invests in foreign assets, it is recorded as a debit on the balance of payments.
  • For example, if a country is importing more than it exports, its trade balance will be in deficit, but the shortfall will have to be counterbalanced in other ways – such as by funds earned from its foreign investments, by running down central bank reserves, or by receiving loans from other countries .
  • It includes the balance of trade (net earnings on exports minus payments for imports), factor income (earnings on foreign investments minus payments made to foreign investors), and cash transfers.
  • It is composed of foreign direct investment, portfolio investment, other investment, and reserve account flows.

• Joint ventures and direct investment

  • A joint venture is a partnership between a domestic firm and a foreign firm.
  • Both partners invest money and share ownership and control of partnership.
  • Thus, they will invest in wholly owned subsidiaries.
  • An organization using this approach makes a direct investment in one or more foreign nations.
  • However, subsidiaries require more investment as the subsidiary is responsible for all marketing activities in a foreign country.

• Exporting

  • A firm can export its products in one of three ways: indirect exporting, semi-direct exporting, and direct exporting.
  • Sales, whether foreign or domestic, are treated as domestic sales.
  • Indirect exporting involves very little investment, as no overseas sales force or other types of contacts need be developed.
  • When direct exporting is the means of entry into a foreign market, the manufacturer establishes an export department to sell directly to a foreign film.
  • Direct exporting requires a greater investment and also carries a greater risk.

• Foreign Investments

  • For example, your brother wants you to invest $10,000 into his business.He promises to repay you $12,000 in two years.If you invested your money into financial securities, you believe you would earn an annual 10% APR.
  • Is it profitable to invest in your brother's business?
  • Investors can use the net present value formula in Equation 28 to calculate the return of a foreign investment.We add a new variable, the exchange rate, Ei, to the formula.Exchange rate converts the value of the foreign investment into the equivalent of our home currency.Unfortunately, the exchange rates change continually, and we assume we know the exchange rate at every point in time.Subscript indicates the specific exchange rate for that year.
  • Is your investment profitable?
  • Exchange rates could fluctuate in any direction.

• International Exchange of Money

  • The foreign exchange market is a form of exchange for international currencies that determines the relative values of different currencies.
  • In a typical foreign exchange transaction, a party purchases a quantity of one currency by paying a quantity of another currency.
  • The foreign exchange market determines the relative values of different currencies.
  • The foreign exchange market assists international trade and investment by enabling currency conversion.
  • It also supports direct speculation in the value of currencies, and the carry trade, speculation based on the interest rate differential between two currencies.

• Balance of Payments

  • If the trade balance is positive, then more money flows into the country than leaves because money moves in the opposite direction of goods and services.
  • Consequently, the United States borrows from foreigners because they invested more assets in the United States than the amount the U.S. residents bought foreign assets.
  • Foreigners invest in government securities, stocks, bonds, and real estate in the United States.
  • Foreign countries collect these U.S. dollars and invest them in the United States.
  • What happens if the foreign investors do not want to invest in the United States?

• Funding the International Business

  • This method is called direct finance .
  • Instability affecting investment funds could stem from a change in government, legislative bodies, other foreign policy makers, or military control.
  • Export-Import Banks provide two types of loans: direct loans to foreign buyers of exports, and intermediary loans to responsible parties, such as foreign government-lending agencies which relend to foreign buyers of capital goods and related services (for example, a maintenance contract for a jet passenger plane).
  • These are an important source of capital for multinational companies and foreign governments.
  • There are two ways in which the capital can end up at the borrower: direct and indirect finance.