Ans. Foreign Direct Investment
Foreign Direct Investment occurs when an investor
based in one country (the home country) acquires an asset in another country
(the host country) with the interest to manage the asset. The company investing
in this country also transfers assets such as technology, management and
marketing. Further, the investing company also seeks the power to exercise
control over decision making in a foreign enterprise - the extent of which has
to vary according to its equity participation. Foreign Direct Investment also
includes reinvested earnings which comprise the direct investor's share of
earnings not distributed as dividends by affiliates or earnings not remitted to
the direct investor. Such retained profits of affiliates of foreign enterprise
are reinvested.
Recently there has been tremendous expansion
of FDI. There are four main characteristic features of growth of foreign direct
investment. These are :
·
The bulk of investment flows is among the developed countries.
·
The growth of investment has been substantial.
·
The developing countries have increasingly become recipients of
FDI.
·
The flow of FDI to developing countries, however, is concentrated
in approximately ten countries.
Foreign Direct Investment specially in
developing countries, has been a very controversial subject. Historically, FDI is
associated with the domination of metropolitan powers over the colonies. It was
believed that these investments were instruments of suppression of national
enterprises and exploitation of these economies for the benefit of foreign
investors. However over the years this historical assessment has given place to
an important role to FDI. A consensus has developed since the eighties that FDI
is essential for economic development.
Portfolio
Investment
Portfolio capital normally moves to
investment in financial stocks, bonds and other financial instruments. Further,
the portfolio capital moves to the recipient country which has revealed its
profitability and has a comparative advantage over the counterparts in
investing country. Portfolio capital unlike FDI is effected largely by
individuals and institutions through the mechanism of capital market. Portfolio
investment to a large extent is expected to be speculative and footloose in its
character. Very often depending on the confidence of the investor, the
investment is made. In the event this confidence is shaken, the capital has a
tendency to shift from one country to another very fast occasionally creating a
crisis for the host country.
Equity capital is the value of the
Multinational Corporations (MNCs) investment in shares of an enterprise in a
foreign country. An equity capital stakes of 10 per cent or more of the
ordinary shares or voting power in an incorporated enterprise is normally
considered threshold for the control of assets. This category includes both
mergers and acquisitions and green field investments (the creation of new
facilities). Mergers and acquisitions are important sources of investment in
developed countries.
Mergers and acquisitions are a popular mode
of investment for firms wishing to project, consolidate and advance their global
competitive positions by selling off divisions that fall outside the scope of
their core competence and acquiring strategic assets that enhance their
competitiveness. For these firms, the "ownership" assets acquired
from another firm, such as technical competence, established brand names and
existing supply networks and distribution systems can put to immediate use
towards serving global customers, enhancing projects, expanding market share
and increasing corporate competitiveness by employing international production
network more efficiently.
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