Foreign investment is the investment of capital in a company or other assets located abroad. Such investments can be both short-term and long-term, their purpose is to generate profit or other benefits in the future.
Each country has its legislation governing foreign investment. The objects of foreign investment can be any sector of the economy of the recipient country, investment into which is not prohibited by law. Entities conducting investment activities on the territory of a country they are not residents of are called foreign investors.
Foreign investment example: A US company invests in a company registered and doing business in Belgium.
Amounts of foreign investment is an important indicator that characterizes the level of integration of the state into the world economic community. Increasing the attractiveness of the investment object also increases the potential amount of investments.
Investment attractiveness is influenced by the overall economic situation in the country, legislation, including the legal regulation of foreign economic activity, as well as the size of the potential market, geographical location, etc. All these factors are called the investment climate.
Types of foreign investment
Foreign investment can be classified as:
- Direct (real). Foreign direct investment means direct investment in a foreign enterprise or individual project: the purchase of equipment, the opening of a new plant, the acquisition of property rights (land, minerals, patents, etc.). Such a direct investment of funds makes it possible to gain control over enterprises or their organizational units. Foreign direct investment is more desirable for the state than indirect because it supports the economy. Direct investment can, in turn, be divided into:
- horizontal, in which the investor company establishes one type of business both in its home country and in a foreign country;
- vertical, assuming that the investor buys a business (or invests in a business) operating within the regular supply chain for the industry of his interest;
- conglomerate, when capital is invested in foreign business from an industry that is unrelated to the main activity of the investing company.
- Indirect (Portfolio or indirect). Foreign portfolio investment is the purchase of securities of companies traded on a foreign stock exchange. Such an investment is made only for a profit, it does not give the right to participate in the company’s activities. Indirect investments enter the country through international financial institutions, banks, funds, etc.
Foreign investment also includes commercial international credits and loans issued to banks and commercial enterprises, as well as foreign investment in the form of leasing. In addition, there can be private, public and mixed foreign investment.
States, especially developing ones, are interested in foreign investment, as they allow increasing the country’s economic potential. To attract funds from foreign investors, governments often offer the latter tax breaks and other benefits.
