What are the types of foreign investment? The four most important types of foreign direct investment

When a company invests in another company in a foreign land, the investment is said to be a foreign direct investment (FDI). Foreign direct investments are further classified into four types. Read on to find out what are the types of foreign direct investment.

Types of foreign investment

The investment market is incredibly massive. Individual investors and large corporations can investment in companies within their own countries as well as abroad.

When a company invests in another company in a foreign land, the investment is considered a foreign direct investment, or foreign direct investment. There are four different types of foreign direct investment. They are as follows:

The following are the most important types of foreign investment:

1. Horizontal foreign direct investment

The most common type of foreign direct investment is horizontal foreign direct investment, which primarily revolves around investing money in a foreign company that belongs to the same industry that the foreign direct investment investor owns or operates.

Here, a company invests in another company located in a different country, as both companies produce similar goods.

For example, you might invest Zara company The Spanish-based company is in or is buying the Indian company Fab India, which also produces similar products as Zara. Since the two companies belong to the same merchandise and apparel industry, the FDI is classified as horizontal FDI.

2. Vertical foreign direct investment

Vertical foreign direct investment is another type of foreign investment. Vertical foreign direct investment occurs when an investment is made within a typical supply chain in a company that may or may not necessarily belong to the same industry.

As such, when vertical foreign direct investment occurs, the company invests in an offshore company that may supply or sell products. Vertical FDIs are classified as backward vertical integrations and forward vertical integrations.

For example, Swiss coffee producing company Nescafe may invest in coffee plantations in countries like Brazil, Colombia, Vietnam, etc. Since the investing company is buying, and is a resource in the supply chain, this type of FDI is known as backward vertical integration.

On the contrary, forward vertical integration is said to occur when a company invests in another foreign company that ranks higher in the supply chain, for example, a coffee company in Saudi Arabia may want to invest in a French grocery brand.

3. Foreign direct investment bloc

When an investment is made in two completely different companies from completely different industries, the deal is known as a foreign direct investment conglomerate. As such, foreign direct investment is not directly related to the investors’ business.

For example, US retailer Wal-Mart might invest in Indian automaker Toyota Motors.

4. Foreign direct investment platform

Another type of foreign direct investment is the foreign direct investment platform. In the case of FDI platform, the company expands to a foreign country, but the manufactured products are exported to another third country.

For example, the French perfume brand Chanel has set up a factory in the USA and exports products to other countries in America, Asia and other parts of Europe.

If you intend to invest via foreign direct investment, you must know the different types of foreign direct investment with examples.

With foreign direct investment, the money invested can be used to start a new business in a foreign country or to invest in an already existing business in a foreign country.

Discuss the types of foreign investment

There are four different types of foreign investment. These are foreign direct investment (FDI), foreign portfolio investment (FPI), official flows, and business loans. These types of foreign investment differ primarily in who grants the loan and how involved the investor is with the loan recipient.

Foreign direct investment occurs when a company invests in a company located in another country. For a private foreign investment to be considered a foreign direct investment, the investing company must own at least 10% of the shares owned by the foreign company.

In these international business relations, the investing company is known as the parent company, while the foreign company is known as a subsidiary of the parent company. Multinational companies, which are spread among several countries, often start with foreign direct investment.

Foreign direct investment also occurs when a foreign investment is made by a company. It may also be made by an individual who has it Mutual funds. While FDI allows the investing company to own the shares of the subsidiary, FDI may be temporary.

Investment instruments, such as stocks and bonds, are usually traded at foreign investment institutions. Stock Andbond They are examples of investments that can be easily traded. A company that has stocks and bonds from a foreign company does not necessarily have a stake in that company in which it invests.

known as foreign investment official flow It happens between states, not between companies. In cases of official flow, a more developed or economically prosperous country will invest money in a less developed country. The country receiving the investment of official inflows usually receives financial support, as well as high-level technology and assistance in government and economic management.

Commercial loan It is a type of foreign investment that usually takes place in the form of a bank loan. This type of investment may occur between countries or between companies located in different countries. While a business loan may be offered by an individual, it usually occurs between larger organizations.

She was commercial loans It was the most common type of foreign investment until the 1980s, especially in cases where the investments went to companies and governments in economically developing countries.

Since then, foreign portfolio investment enterprises and foreign direct investment have become more common. The term globalization is usually used to describe the phenomenon of increasing use of foreign investment enterprises in investment portfolios and foreign direct investment.

While commercial loans are issued by banks and supported by the government, foreign investment enterprises and foreign direct investment are private investments.

common questions

What is foreign cooperation?

A foreign cooperation is an alliance established to carry out the collectively agreed task with the participation (role) of resident and non-resident entities. cooperation between local government companies and foreign private companies; And the. Cooperation between local government and foreign government.

Is foreign investment good or bad?

There is an increasingly populist view that foreign investment is bad for some countries: it takes jobs, it takes profits out of the country and foreigners end up owning the land.

How to attract foreign investment?

Contribute to the establishment of investment promotion agencies (IPA). A successful IPA can target the right foreign investors and can then become the link between them and the local economy. On the one hand, it must act as a one-stop shop for the requirements these investors make of the host country.

What is the impact of foreign investment?

Foreign direct investment (FDI) affects Economic growth to the host country through the transfer of new technologies and knowledge, the formation of human resources, integration into global markets, increased competition, and the development and reorganization of companies.

How does foreign direct investment affect the economy?

Research shows that increased foreign direct investment leads to higher growth rates in the financially advanced countries than the rates observed in the financially poor countries.
Local conditions, such as the development of financial markets and the educational level of a country, influence the impact of foreign direct investment on economic growth.

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