Introduction to International Investment
International Investment is one of the investment strategies in which an investor diversifies his portfolio by purchasing various financial Instruments like shares, mutual funds, etc. or investing to acquire ownership or collaboration in different companies across the globe in order to maximize the return and to reduce their exposure to various investment risks.
International Investment provides an opportunity for investors to capitalize on the good performance of the foreign economy if their domestic economy’s performance is relatively bad. These investments are mostly driven by the macroeconomy of the country and most investor focus on the emerging economy
Types of International Investment
On the basis of the use of investment foreign investments are classified into two categories:
- Foreign Direct Investment (FDI)
- Foreign Portfolio Investment (FPI)
1. Foreign Direct Investment
FDI is an investment when the investor invests in the business situated on foreign land in order to acquire ownership or collaboration. Through FDI investors establish a lasting interest with the business entity that implies the existence of the long-term relationship of the investor with the enterprises with a significant degree of influence on the management of the business.
According to the Organization of Economic Cooperation and Development (OECD), the direct or indirect ownership of 10% or more of the voting power in the business by foreign investors is considered under the category of FDI.
FDI Transactions are done in mainly three ways:
- Greenfield Project.
- Joint Ventures.
- Merger & Acquisition (M&A) also called Brownfield investment.
The three ways are explained below:
- Greenfield Projects: When FDI is used to start an enterprise in a foreign country from scratch and don’t acquire an existing company to enter the market. Greenfield project also includes the construction of new plants, offices, etc.
- Joint Ventures: When FDI is used to enter in venture with the foreign corporations in order to expand their business in a foreign country.
- Brownfield Investment: It is another type of FDI transaction in which investment is used to merge or acquire an enterprise on foreign land. Joint Ventures and Brownfield investments are mostly used to enter the foreign market.
Example #1 – FDI: Brownfield Investment: (Tata & Corus deal)
Tata Steel one of the Indian steel market giants acquired Corus Group plc, known as one of the largest steel producers of the UK. The deal was officially announced on April 2nd, 2007, the total value of this acquisition was ₤6.2 billion (US$12 billion). This states that Tata Steel an Indian company made a direct investment of ₤6.2 billion (US$12 billion) in the Corus Group plc a UK based enterprise in order to acquire management control in the enterprise.
Example #2 – FDI: Greenfield Investment
Investment by MNCs like Coca-Cola, Starbucks, Accenture, etc. in various overseas countries is a good example of greenfield investment. These companies don’t enter the foreign market through mergers or acquisitions, they directly invest in the foreign economy to construct a new production facility, offices, etc.
2. Foreign Portfolio Investment (FPI)
FPI is an investment made in a foreign economy by an investor with no motive to gain any role in the management of any organization. Foreign Portfolio Investors purchase securities traded in another country, which is highly liquid and can easily get buyers when required. Such securities include instruments like stocks and bonds. FPI can be short-term in nature in cases when the investor wants quick return due to change in the exchange rate, interest rate, etc. Otherwise, the foreign portfolio investment is done with plans of holding onto the asset for long-term and such investments are driven by the growth rate of the economy, Macroeconomic stability, Interest rates, etc.
Factors Affecting International Investment
Factors Affecting International Investment are:
In Case of FDI
- Ease of Doing Business of the country, like rules and regulations related to entry in the market and to support operations of the new greenfield business.
- Political and Social conditions of the economy.
- Policies on the functioning & structure of markets (esp. competition & merger and acquisition [M&A] Policies.
- Policies related to ease the business, such as investment promotion, incentives, improvements in amenities and other measures to reduce the cost of business.
- Privatization Policy.
- Trade policy (barriers-tariff & non-tariff) and coherence of FDI and trade policies.
In Case of FPI
- National economic growth rates.
- Exchange Rate stability.
- General macroeconomic stability.
- Levels of foreign exchange reserves.
- Interest rates.
- Taxes on Capital gains
- Regulation of the stock and bond markets
- Quality of domestic accounting and disclosure systems
- Dispute settlement systems of the economy and degree of protection of investor’s rights.
International Investment Calculation
The calculation of international investment is explained below:
Net Foreign Investment (NFI): NFI is also referred to as net capital outflow from the economy. It is the difference of net investment is done by people in the overseas economy and net investment done by overseas people in the domestic economy.
NFI= Net Outflow of Investment – Net Inflow of Investment
NFI includes Outflow and Inflow of both Foreign Direct Investment and Foreign Portfolio Investment.
NFI is one of the important parameters to analyze the Financial Condition of the economy. Negative NFI states that the nation is a debtor nation and vice versa.
Advantages and Disadvantages of International Investment
Below are the different advantages and disadvantages of International Investment:
- Foreign Investment can stimulate the country’s economy and also boost the local industries.
- International Investment creates new job opportunities, this leads to an increase in the purchasing power of people and increase their standard of living.
- Parent enterprises would also provide investment to get additional expertise, technology, and products.
- As an Investor International Investment is an opportunity to expand his business, diversify his portfolio, to get entry into the new market.
- Reduction in cost of production.
- Tax Incentives
- International Investment makes things tough for local companies by creating huge competition.
- The risk of Political change will always be a concern for investors as it can lead to expropriation.
- Unstable Economic condition can make your investment economically non-viable.
- International Investment can impact exchange rates that can make things worse for the investor or the target economy.
Investors through international investors can invest in foreign financial instruments and also expand their business in foreign territory. All the International investments are done through FDI or FPI route. These investments are highly rewarding but also carries risk with it, so it becomes very important to do proper analysis and due diligence before making such investments.
This is a guide to International Investment. Here we discuss the Introduction and Types of International Investment along with Advantages and Disadvantages. You may also look at the following articles to learn more –