For example, it is possible to exert control over more widely traded firms despite owning a smaller percentage of voting stock. Foreign investment can bring new technology, expertise, and skills to the domestic economy, which can help improve productivity and competitiveness. This can be particularly beneficial for developing economies that lack the resources or knowledge to develop new technologies or products. As a base for doing business with China, Hong Kong now accounts for half of all direct investments in the mainland and is China’s main conduit for investment and trade. In 1997, Hong Kong reverted back to Chinese control; however, free enterprise will be governed under the agreement of Basic Law, which established Hong Kong as a separate Special Administrative Region (SAR) of China.

In some cases they will be buying the local company because they want to make a bunch of new investments and help it grow. But in other cases they may be looking to cut costs, which could mean laying people off, reducing salaries, or scaling back operations. Foreign direct investment takes many forms in practice but is generally classified as either a vertical, horizontal, or conglomerate investment. Although FDI is generally restricted to large players who can afford to invest directly overseas, the average investor is quite likely to be involved in FPI, knowingly or unknowingly. Every time you buy foreign stocks or bonds, either directly or through ADRs, mutual funds, or exchange-traded funds, you are engaged in FPI.

Here, a company invests in another company located in a different country, wherein both the companies are producing similar goods. For example, the Spain-based company Zara may invest in or purchase the Indian company Fab India, which also produces similar products as Zara does. Since both the companies belong to the same industry of merchandise and apparel, the FDI is classified as horizontal FDI.

Foreign investment can help to boost both the recipient’s economy and the economy of the country of origin. If you buy shares in a foreign company, or any other type of investment, including bonds, mutual funds, and ETFs, you are indirectly helping to fund the economy of the country where it is located. However, unlike with the FDI, your investment should be easy to sell and will be passive in nature—you won’t be influencing how it is run. In addition, large corporations often look to do types of foreign investment business with those countries where they will pay the least amount of taxes.

1. Keep in mind that a company doesn’t need to sell in the local market in order to deem it a good option for direct investment.
2. It can also provide a source of foreign capital and contribute to international trade.
3. It’s a force that can transform skylines, revitalize industries, and reshape the economic destinies of entire regions.
4. This not only provides the company with a reliable supply of resources but also reduces its dependence on a single source.
5. As per the foreign direct investment statistics, many companies start everything from scratch when operating in a foreign country.

International Business

When a firm sells the goods into the local or regional market (i.e., acting as a distributor), this is termed forward vertical FDI. The largest global companies often engage in both backward and forward vertical FDI depending on their industry. Foreign direct investments (FDIs), also sometimes called direct foreign investment (DFIs), boost economic growth, provide job opportunities and offer expansion for businesses and governments beyond their borders. FDIs are substantial, lasting investments in a foreign business made by a company or government. There are different kinds of FDI, two of which—greenfield and brownfield—are increasingly applicable to global firms. Greenfield FDIs occur when multinational corporations enter into developing countries to build new factories or stores.

Main Purpose of Foreign Investment

Under its Basic Law, in force until 2047, Hong Kong will retain its legal, social, economic, and political systems apart from China’s. Thus, Hong Kong is guaranteed the right to its own monetary system and financial autonomy. Hong Kong is allowed to work independently with the international community; to control trade in strategic commodities, drugs, and illegal transshipments; and to protect intellectual property rights. Under the Basic Law, the Hong Kong SAR maintains an independent tax system and the right to free trade. Thus, the above are some key differences between the two types of investments in the global markets, which mainly lead to strategic control and ownership. There are various important reasons why the foreign investments are necessary in an economy.

Conglomerate FDI

Foreign indirect investments involve corporations, financial institutions, and private investors buying stakes or positions in foreign companies that trade on a foreign stock exchange. In general, this type of foreign investment is less favorable, as the domestic company can easily sell off its investment very quickly, sometimes within days of the purchase. FPI refers to individuals, corporations, or institutions investing in foreign financial assets such as stocks, bonds, or other securities. Unlike FDI, portfolio investors typically do not have control over the enterprises they invest in. FPI is generally more liquid than FDI, allowing for easier entry and exit, and often has a shorter-term focus.

Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

Expand Business

A grouping of assets, such as stocks, bonds, and cash equivalents, is referred to as a foreign portfolio investment. Investors directly hold the investments in their portfolio, or financial experts may manage it. By the 1990s (and earlier for China), many of the countries in Asia had caught the global trade bug and were actively trying to modify their policies to encourage more FDI. Some were more successful than others, often as a result of internal political issues and pressures rather than from any repercussions of global trade (UNCTAD, 2011).

FDI inflows as a percentage of gross domestic product (GDP) are a good indicator of a nation’s appeal as a long-term investment destination. China’s economy is currently smaller than the U.S. economy in nominal terms. FDI as a percentage of GDP in 2022 was 1.0% for China, compared with 1.5% for the U.S. For smaller, dynamic economies, FDI as a percentage of GDP is often significantly higher. For instance, it represented 359.2% for the Cayman Islands and 33.6% for Hong Kong in 2022. Apart from the importance of foreign investment, there are some disadvantages also as given below.

Usually, you have to look at things like political, demographic, social and economic factors to make sure that you will come out winning in the end. The last thing that you need is a hotbed of political unrest, or a stable society but one where the majority of people will not be able to afford what you are selling. An investment into a foreign firm is considered an FDI if it establishes a lasting interest. A lasting interest is established when an investor obtains at least 10% of the voting power in a firm. The availability of a skilled and educated workforce is also an important factor that can influence foreign investment.