Foreign investment refers to the investment made by the foreign individuals or corporations or government. Thus, it indicates foreign capital flows to the home country. However, such investments are generally for developmental projects, business, industry and in the stock market also. Some examples are investment by Cocacola, Pepsi, Mcdonalds, Hyundai etc.
- Foreign direct investment (FDI): Under FDI, the foreign investors make investment in the owned capital of an entity of the domestic country. Thus, FDI investors hold majority shares in the investing company and control the decision making and management of the company.
- Foreign portfolio investment (FPI): Under, FPI the foreign entities or individuals makes investment in a domestic company of the investing country in its owned and borrowed capital. Thus, the investors don’t hold majority shares and control of the company lies with the original owners.
- Foreign institutional investors (FII): Under FII, the foreign institutional investors like mutual fund companies etc. makes such investment. Stock exchanges facilitates such transactions. Thus, the foreign investments are made in different sectors like real estate, infrastructure, automobile, technology firm etc.
The advantages are as follows-
- Firstly, it facilitates positive growth of employment and the economy of a country.
- Secondly, it helps in growth of human capital of an economy by providing training, skills, know-how etc.
- Additionally, it develops the underdeveloped and developing economy as it invests in their potential areas.
- Again, it leads to inflow of capital, sophisticated technology, operation process, work culture etc. to the investing country.
- Finally, it increases production and productivity and supports an increase in export of the country.
- There is huge outflow of cash from the investing country in the form of royalty, profit, dividend, interest etc.
- Excess dependence on foreign capital leads to a deficit in the trade balance of the investing country.
- The investing country may fall under debt trap of the investor and there is a chance of political interference by the investor country.
- The investing country is influenced by the culture of the investors.