Foreign investment can be classified into four types: foreign direct investment (FDI), foreign portfolio investment (FPI), official flows, and commercial loans. FDI involves a company investing in a business in another country, while FPIs are more temporary and involve investment instruments like stocks and bonds. Official flows occur between nations, while commercial loans are typically bank loans between companies in different countries. FPIs and FDIs have become more common than commercial loans since the 1980s.
There are four different types of foreign investment. These are foreign direct investment (FDI), foreign portfolio investment (FPI), official flows and commercial loans. These types of foreign investment differ mainly in who makes the loan and how committed the investor is to the recipient of the loan.
FDI occurs when a company invests in a business located in another country. For a private foreign investment to be considered FDI, the company that is investing must have no less than 10% of the shares belonging to the foreign company. In these international business relationships, the company that is investing is known as the parent company, while the foreign company is known as a subsidiary of the parent company. Multinational corporations, spanning several nations, often start with FDI.
FPIs also occur when a company makes foreign investments. They can also be done by a person who has mutual funds. While an FDI allows the investing company to own shares in the subsidiary company, an FPI can be more temporary. Investment instruments, such as stocks and bonds, are typically traded on FPIs. Stocks and bonds are examples of investments that are easily traded. A company that owns shares and bonds of a foreign company does not necessarily have a stake in that company in which it is investing.
Foreign investment known as official flow occurs between nations rather than between companies. In official flow cases, a more developed or economically prosperous nation will invest money in a nation that is less developed. A nation receiving an official flow investment will generally receive financial support, as well as higher-grade technology and help in governmental and economic management.
A business loan is a type of foreign investment that typically occurs in the form of a bank loan. This type of investment can occur between nations or between companies that are located in different countries. While a business loan can be made by an individual, it would typically occur between larger organizations.
Commercial loans were the most common type of foreign investment until the 1980s, especially in cases where the investments went to companies and governments of economically developing countries. Since then, FPIs and FDIs have been much more common. The term globalization is commonly used to describe the phenomenon of increased use of FPI and FDI. While commercial loans are issued by banks and backed by a government, FPIs and FDIs are private investments.
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