Foreign investment aims to transfer capital from one country to another. This process is done by handing over the ownership shares of companies and assets of the investing country. This issue intensifies the influence of foreign investors in the management of domestic companies. In this regard, we are facing a new way of globalization, during which existing multinational companies invest in different countries.
The reason for the importance of this investment is economic growth and development, especially in developing countries, increasing job opportunities, developing capabilities in the field of management and technology, as well as increasing the quality of products. In foreign investments, the available funds are used in activities where the risk of return of capital and its benefits is the responsibility of the investor.
The Nature of Foreign Investment
Foreign investment is like a double-edged sword that affects economic conditions in both developed and developing countries. On the one hand, developed countries are willing to invest in other countries due to the large amount of capital they have. On the other hand, developing countries need to attract capital in order to grow their economic conditions. The preference of developing countries to finance themselves is to conclude contracts with foreign investors instead of borrowing from international financial and monetary sources.
In this regard, there are concerns for both sides of foreign investment. On the one hand, foreign investors are looking for the safest and safest area for investment due to the preservation of their capital. On the other hand, the investor countries are trying to minimize these problems due to the negative consequences of the entry of foreign capital.
Types of Foreign Investment
We have the divisions of foreign investment on two bases:
A) Based on the Investor
1. Public Foreign Investment
Investments are made by governments or by international organizations. The application of projects in the direction of development or in the field of commerce, which is directly related to the economic life of a country and is carried out by the government, is an example of this investment.
2. Private Foreign Investment
Investing in this case is done by natural and legal persons of the private sector. This is one of the most important and main investment options, especially in developed countries. The main and special feature of this investment is earning profit and not interfering with the government.
B) Based on the Investment Method
1. Foreign Direct Investment
This method is the most traditional mode of investment. At the same time, a natural person or a commercial legal entity from a country provides the capital needed for economic activities in the investing country. Direct investment is physical investment; That is, it includes things like building a factory, buying a building, buying equipment needed to establish a company or start a foreign project. This investment model is long-term and provides economic growth for the investing country.
Types of Direct Investment
During direct investment, investors also implement activities in a foreign country in line with the business activities they carry out in their own country. For example, a manufacturer of audio and video equipment in America is opening a store in China.
In vertical direct investment, the investor performs an activity related to his main activity but in a different way in another country. For example, a manufacturer of audio and video equipment in America should produce its raw materials in China.
Investing is done independently in a field that has nothing to do with the investor’s main work. In other words, the investor invests in a project and industry in which he/she has no skills or experience. In this case, the investor works as a partner with a foreign company active in this industry.
2. Indirect Foreign Investment
In indirect investment, the investor buys shares of a company in the stock market. As a result, amounts of cash enter the economic cycle of the country. The purpose of this purchase of shares is not to acquire ownership or to exercise management over the shareholder company. That is why it is called indirect.
A point that is very important in relation to indirect investment is the burden of responsibility for the risks arising from it. The investor assumes the risk and risks arising from the investment; In fact, he cannot sue the stock market or public institutions for the losses he incurs.
Up to Sum
Considering the growing trend of world trade and the desire of countries to become global, it is necessary for governments to be familiar with all types of foreign investments. Foreign investments can either be objective and in the form of buying buildings and equipment, etc. or in a cooperative form in the form of buying shares of foreign companies. Both of these cases can affect the economic conditions of the investing and investing countries. Especially, foreign investment is more important and sensitive in developing countries.