Meaning AND TYPES OF FOREIGN INVESTMENT

developmental economics question and need the explanation and answer to help me learn.

Foreign investment refers to the investment in domestic companies and assets of another
country by a foreign investor. Large multinational corporations will seek new opportunities
for economic growth by opening branches and expanding their investments in other
countries. Foreign direct investments include long-term physical investments made by a
company in a foreign country, such as opening plants or purchasing buildings.
Foreign indirect investment involves corporations, financial institutions, and private
investors that purchase shares in foreign companies that trade on a foreign stock exchange.
Commercial loans are another type of foreign investment and involve bank loans issued by
domestic banks to businesses in foreign countries or the governments of those countries.
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. 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
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office or parts of their business to a country that is a tax haven or has favorable tax laws
aimed at attracting foreign investors. Some of the more popular tax haven countries that
attract foreign investors include the Bahamas, Bermuda, Monaco, Luxembourg, Mauritius,
and the Cayman Islands.
TYPES OF FOREIGN INVESTMENT:
Foreign investments can be classified in one of two ways: direct and indirect. Foreign direct
investments (FDIs) are the physical investments and purchases made by a company in a
foreign country, typically by opening plants and buying buildings, machines, factories, and
other equipment in the foreign country. These types of investments find a far greater deal
of favor, as they are generally considered long-term investments and help bolster the foreign
country’s economy.
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 form of foreign investment is less favorable, as the domestic
company can easily sell off their investment very quickly, sometimes within days of the
purchase. This type of investment is also sometimes referred to as a foreign portfolio
investment (FPI). Indirect investments include not only equity instruments such as stocks,
but also debt instruments such as bonds.
Other Types of Foreign Investment: Commercial Loans and Official Flows
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 flow 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.
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Another kind of Foreign Investment: Multilateral Development Banks
A different kind of foreign investor is the multilateral development bank (MDB), which is an
international financial institution that invests in developing countries in an effort to
encourage economic stability. Unlike commercial lenders who have an investment objective
to maximize profit, MDBs use their foreign investments to fund projects that support a
country’s economic and social development. The investments—which typically take the
form of low- or no-interest loans with favorable terms—might fund the building of an
infrastructure project or provide the country with the capital needed to create new industries
and jobs. Examples of multilateral development banks include the World Bank and the Inter-
American Development Bank (IDB).
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