Types of investment
There are two types of foreign investment
- foreign direct investment,
- non-direct investment (portfolio investment)
Foreign direct investment (FDI) takes place when a company, multinational corporation or individual from one country invests in another country’s assets or takes an ownership stake in its companies. It generally takes the form of acquiring a stake in an existing enterprise in the foreign country or starting a subsidiary to expand the operation of an existing enterprise of that country.
FDI can take two different forms: Greenfield or mergers and acquisitions (M&As).
- greenfield investment involves the creation of a new company or establishment of facilities abroad. A greenfield investment is a form of market entry commonly used when a company wants to achieve the highest degree of control over foreign activities
- mergers and acquisitions amounts to transferring the ownership of existing assets to an owner abroad. In a merger, two companies are merged to form one, while in an acquisition one company is taken over by another.
Non-direct investment - also referred to as ‘foreign portfolio investment’ - takes place when companies, financial institutions or individuals buy stakes in companies on a foreign stock exchange. This type of investment is not made with the intention of acquiring a controlling interest in the issuing company. Typically, this type of investment is short-term in nature and is made to take advantage of favourable changes in exchange rates or to earn short-term profits on interest rate differences. It provides the investors with an opportunity to diversify their portfolios and better manage the associated risk.
Foreign portfolio investment can also help to strengthen the domestic capital markets by enhancing liquidity and contribute to improving their functioning. This in turn will lead to optimal allocation of capital and resources in the domestic economy. For an emerging economy, foreign portfolio investment can prove to be a significant contributor to its development, creating significant wealth.