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Foreign Direct Investment

In: Business and Management

Submitted By alilam1
Words 2791
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3- Foreign Direct Investment

Background
There has been a tremendous growth in foreign or international investment since 1990s. The underlying reasons for such international flows of capital can be attributed to several factors. International investment, for example, allows capital to find the highest rate of return, helps the owner of capital to diversify his or her lending and therefore reduces the associated risk, contributes to further development and spread of best practices in corporate governance and accounting rules, and finally it prevents the government from pursuing poor policies.
The aforementioned advantages of the free flow of capital across national borders can be realized through two primary kinds of international investment: (1) Foreign Portfolio Investment (FPI) and
(2) Foreign Direct Investment (FDI).
While FPI is defined as investment in a portfolio of foreign securities such as stocks and bonds, it does not entail the active management of foreign assets. In other words, FPI is “foreign indirect investment” in that it represents passive holdings of foreign securities not least because the investor does not have control over the securities’ issuer. Exchange rates, interest rates, and tax rates on interest or dividends are factors that directly impact on FPI.
In contrast, foreign direct investment, commonly known as FDI, refers to an investment made to acquire lasting or long-term interest in enterprises operating outside of the economy of the investor. The investment is direct because the investor, which could be a foreign person, company or group of entities, is seeking to control, manage, or have significant influence over the foreign enterprise.

An example of FDI is when a Japanese company takes a majority stake in a company in America, Iran, or elsewhere. In comparison to FPI, FDI requires exercising management control rights,

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