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What are the Different Types of Foreign Investment?

By D. Nelson
Updated May 16, 2024
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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 primarily in who gives the loan and how engaged the investor is with the receiver of the loan.

FDIs occur when a company invests in a business that is located in another country. In order for a private foreign investment to be considered an 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, whereas the foreign company is known as a subsidiary of the parent company. Multinational corporations, which spread among several nations, often begin with FDIs.

FPIs also occur when foreign investments are made by a company. They may also be made by an individual who has mutual funds. Whereas an FDI allows the investing company to own shares of the subsidiary company, an FPI may be more temporary. Investment instruments, such as stocks and bonds, are normally traded in FPIs. Stocks and bonds are examples of investments that are easily traded. A company that has stocks and bonds from a foreign company does not necessarily have a share in that company in which it is investing.

The foreign investment known as official flow occurs between nations instead of between companies. In cases of official flow, a more developed or economically prosperous nation will invest money in a nation that is less developed. A recipient nation of an official flow investment will typically receive financial support, as well as higher grade technology and aid in government and economic management.

A commercial loan is a type of foreign investment that normally occurs in the form of a bank loan. This kind of investment may occur between nations or between businesses that are in different countries. While a commercial loan may be made by an individual, it would normally occur between a larger organizations.

Commercial loans were the most common kind of foreign investment until the 1980s, especially in cases in which investments were going to the companies and governments of economically developing countries. Since then, FPIs and FDIs have been much more common. The term globalization is normally used to describe the phenomenon of an increased use of FPIs and FDIs. Whereas commercial loans are issued by banks and backed by a government, FPIs and FDIs are private investments.

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Discussion Comments
By NathanG — On Sep 17, 2011

@allenJo - It’s interesting that you mention China. I once watched this documentary about the expansion of McDonald’s in China.

While McDonald’s has been expanding tremendously, they have had to adapt to the local culture. Here I am not referring simply to changes in the menu, but to changes in the culture.

Most Chinese, for example, were not at all familiar with the concept of a drive-through. In order to adapt, McDonald’s stores had to train workers to guide customers through the drive-through, almost as if they were parking lot attendants.

These may seem like small details but they were part of the larger picture of making McDonald’s amenable, if you will, to Chinese culture, and enabling them to continue to sell to that market.

By allenJo — On Sep 16, 2011

@SkyWhisperer - I’ve never had a piece of an overseas company through direct investments; however I have balanced my stock portfolio with foreign portfolio opportunities.

I like to have a few emerging markets in my portfolio, and Asia is one of those markets. Soon those emerging markets will catch up with the big leaders in Asia, like China, and I’d like to be in on the ground floor when it happens.

By SkyWhisperer — On Sep 16, 2011

@Charred - Yes, foreign investment opportunities in emerging markets are typically high risk ventures. Our software company developed a joint partnership with a company overseas in India.

Before we established the relationship we conducted an analysis of important factors that could affect our risks one way or the other.

Usually, you have to look at things like political, demographic, social and economic factors to make sure that you will come out winning in the end. The last thing that you need is a hotbed of political unrest, or a stable society but one where the majority of people will not be able to afford what you are selling.

India has proven to be a fairly good partner for software industries for quite some time; so far it’s been beneficial for us too.

By Charred — On Sep 15, 2011

Well, I know a little something about foreign direct investment, but not through my own resources.

I spent some time living in Indonesia, before the Asian currency meltdown of the late 1990s. Before the collapse, it seemed like Western companies everywhere were flooding into that nation to establish their presence there.

It seemed like Asia was the place to be, and there was a growing wealthy middle class. Business was flourishing. Even WalMart set up shop near where I live.

Then the collapse happened; it was a major currency devaluation, and just as surely as WalMart set up shop, they took down their shingles and left for good.

I don’t know if they’ve been there since, but I do know that they were the target of some of the ensuing riots and that’s why they left. It would have been a profitable venture, but it was high risk too.

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