Foreign Investment

Foreign investment is the movement or accumulation of long term capital across political boundaries.  It may take the form of cash, securities, plant, equipment, and other factors of production, such as managerial skills, technology, or know how. The growth in multinational organizations which has resulted from foreign direct investment has contributed to the fact that by the turn of the 21st century over a quarter of the global GDP was produced by just 200 companies.  Categories of international capital flows appearing in the balance-of-payments accounts: namely, short term investments, portfolio investments and direct investments.  These categories are distinguished from each other in the balance-of-payments accounts represent different degrees of liquidity and respond to different influences.

Short term investments, begins with a discussion of the criterion for making short-term covered investments when there are costs of transacting in the foreign exchange markets.  Since short-term investments are important aspects of cash management, looks at short term borrowing decisions and a number of other aspects of the management of working capital in a multinational context.

Portfolio investment considers international aspects of stock and bond investment decisions, paying particularly close attention to the benefits of international portfolio diversification.  It is shown that international diversification offers significant advantages over domestic diversifications, despites uncertainty about exchange rates.  A section is included on the international capital asset pricing model.  This model is used to compare the implications of internationally segmented versus integrated capital markets

Foreign direct investment usually involves some combination of the above.  The transfer of this “package” of capital assets as well as the retention of control is what distinguishes FDI from portfolio investment.  Example of Measuring Foreign direct investment is the United States includes retained earnings and locally financed direct investments by American affiliates in its measure of FDI. Capital budgeting frame work that management can employ when deciding whether to make foreign direct investments.  Foreign investment provides an inflow of foreign capital and funds, in addition to an increase in the transfer of skills, technology, and job opportunities.