By Molly Cyrus 
Introduction
Foreign investment is a key element in the world market and it holds an essential share in the growth of developed as well as developing economies. In a nutshell this idea regards investments by individual corporations or governments in local companies or economic resources of another country. There are two main types of foreign investment Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI).
While FDI involves buying shares of a foreign company or investing directly in a country’s productive assets such as factories or corporations where the business is controlled by the investors. FPI involves simply investing in financial assets equities and bonds. In the 21st century foreign investment has emerged as one of the most significant engines of globalisation connecting economies across borders through the movement of financial resources styles of production and expertise.
Foreign investment helps promote trade create jobs stimulate economic growth and transfer knowledge and skills. However it can also create potential risks challenges and economic reliance on the host country. Understanding the various complexities of foreign investment including types of historical evolution and the implications and impact on both investing and recipient countries is critical to informing economic policy and stimulating broad global economic progress.
This article attempts to provide a holistic understanding of foreign investment along with classification trends challenges and local impact including sectors and sub sector impacts regional/trends policy reform and the future of foreign investment in an increasingly connected world.
Types of Foreign Investment
Foreign investment can generally be viewed in terms of two classifications Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI). Each foreign investment classification provides stakeholder motives in the economy and impacts various sectors and host country settings.
Foreign Direct Investment (FDI)
FDI is classified as a substantial amount of capital invested in which the investment affords an investor a demonstrable longlasting interest (at least more than one year) with at least some degree of management influence over a foreign firm. FDI can encompass among others
Greenfield Investment
This refers to when a firm establishes a new operation from inception in a foreign country including building new facilities creating new employment and improving the local infrastructure. This is the most positive form of FDI for host countries.
Mergers and Acquisitions (M&A)
In a merger or acquisition a foreign company purchases or merges with an established company in the host nation. M&As tend to be prevalent in industries in which there are significant barriers to market entry because in some cases it has proven much cheaper to buy a company and get access to its customers and market share than to build a company from the ground up.
Joint Ventures
A foreign company can enter into a joint venture with a domestic company forming a new business entity. Both the foreign and domestic companies share resources risks and profits.
FDI is beneficial to both the investor and the host country. In addition to potentially bringing advanced technologies to the host country the foreign company also typically increases productivity for the host country and creates jobs for the local municipality. The investor typically benefits from access to new markets and natural resources and potentially lower direct costs of production.
Foreign Portfolio Investment (FPI)
Foreign Portfolio Investment is the purchase of financial assets including stocks bonds or other securities by an investor from a foreign country. Unlike FDI the investment would not allow for control over the day to day operations of the company. Rather the investor usually wants to achieve some return on their investments either through capital gains or received interest. FPI may or may not have volatile swings like FDI since sometimes the investor is often driven by short term market returns and sentiments.
FPI is not as stable an investment form as FDI however it can be an important factor in providing liquidity to financial markets and facilitating the flows of capital to other countries.
Determinants of Foreign Direct Investment
There are a variety of factors that determine whether a firm invests in foreign countries. Also these determining factors will vary across the different types of investment (e.g. FDI versus FPI) and across different sectors/industries that the foreign investment is in.
Market Size and Growth
Potential Market size and potential for growth are two of the most important factors that attract foreign investment. Naturally investors tend to migrate to countries with huge consumer markets burgeoning incomes and accelerating economic growth. For example China and India have been magnets for FDI inflows over the last few decades thanks to their large expanding consumer bases.
Political and Economic Stability
Foreign investors are attracted to politically and economically stable nations. Correspondingly suppose a country is notorious for political instability widespread corruption and brazen misgovernance. In that case foreign investments will flee lest the risks associated with doing business in that country drive down the investments returns. Economic indicators like inflation rates exchange rate stability and fiscal policies also tend to dominate every investor’s list especially FDI seekers.
Regulatory Environment
The legal and institutional system of a country is just as important a factor as all the others. As much as possible investors tend to dwell in countries that have relatively well defined fair and tightly monitored regulations regarding taxation investment/property rights and labour laws. Countries often seen as having too much red tape and a lack of transparency in their laws are likely to attract a lower amount of foreign investment.
Infrastructure
Like a rational person an investor should only put his money in a country where efficient transportation networks telecommunications and an unbroken power supply exist. The reason is simple the existence of these facilities will ensure that the business logistical and infrastructural needs will be met. It follows that countries that invest in infrastructure development attract a greater amount of foreign investment.
Natural Resources
The availability and abundance of natural resources are factors that investors have always taken into consideration while mulling a foreign investment. You will agree that a country rich in oil will attract a lot of investment from oil majors. Similarly a country that is rich in gold minerals or agricultural products will also tend to attract a lot of investments from abroad that seek to extract and then export these products.
Overhead and Related Staff Cost Factors
Overhead labour and labour skills of the countries where companies want to set up branches act as the most crucial factors in foreign investments. Labour Intensive companies especially in the manufacturing process often go to developing countries with cheap labour to cut on production costs. On the contrary components or industries with a high technical division of labour will look for countries boasting high education standards among their inhabitants.
Trade Policies and Access to Markets
Foreign investment is always attracted to countries whose policies promote trade. Most people especially investors prefer going to countries that have traded with the main economic regions as these lead to easy sales of goods and services which are an added advantage. A case in point is that of Mexico which became a member of the North American Free Trade Agreement and turned out to attract a lot of FDI from the US.
Analysis of Foreign Investment Trends
The global economic situation technical progress and international policy largely determine the tendency to develop foreign investment. We now live in a time in which over the last few decades several distinct developments can be observed in the activities related to foreign direct investment.
Rationale for Moving Investment
FDI generally flows from developed countries such as the United States and Western European countries to other countries like the Netherlands which have shown reduced economic activities.
Rising Emergence of Emerging Markets
It has become more meaningful especially due to the rise of the so called emerging markets countries which are now the hub for recipients and sources of foreign investments. The countries of China India and Brazil which emerged in the global economy had a multiplier effect on outward FDI emanating from their countries. In particular Chinese companies invest much in Africa Asia and Latin America within China’s Belt and Road Initiative to enhance trade and investment links.
Technology and Innovation Driven Investments
The character of foreign investments has also changed due to the technological revolution. Investments in technologically advanced sectors data driven economies and innovation clusters have become popular. Innovation friendly countries such as the United States South Korea and Israel are still the global leaders in hitech industries including AI biotechnology and fintech with tremendous FDI inflows coming their way especially in the wake of the COVID19 pandemic.
Sustainable and Green Investments
In the past years the importance of sustainability and environmentally responsible foreign investment has increased. Investors are increasingly concentrating on ecologically friendly projects in terms of renewable energy and sustainable business manners. This trend is significantly attributed to the increasing demand for green products and international agreements that strive to fight climate change.
Global Economic Uncertainty and Investment Slowdowns
Global economic uncertainty resulting from sources like trade tensions geopolitical conflicts and the COVID19 pandemic has been stifling foreign investments in many areas. For instance the pandemic decreased global FDI flows by large margins in 2020 as most businesses either put or scaled back their investments due to uncertainty over the economy.
Challenges and Risks of Foreign Investment
There are numerous benefits that foreign investment offers to the host countries and foreign investors as well as several challenges and risks for both parties.
Economic Dependence
One of the significant problems with foreign investment particularly in developing countries is that it threatens to create economic dependency. If a country becomes too dependent on foreign capital it can become hostage to external economic shocks or the vagaries of investor sentiment. For example a sudden withdrawal of foreign investment creates a financial crisis devalues the currency and brings about an economic crisis.
Exploitation of Natural Resources
In resource rich nations foreign investment in the extractive industries might sometimes be linked with overexploitation of resources. While it may have contributed to extraction activities this process has been reported to have adverse environmental impacts and consequences in terms of natural resources like deforestation and water pollution as well as loss of biodiversity. An improvement in the working conditions and labour rights may also mitigate the limitations in long term benefits arising from foreign investment.
Labour Laws and Employment Conditions
In some cases foreign investors may target cost cutting by violating labour rights and conditions of work. This can lead to the exploitation of workers due to low wages horrible working conditions and job insecurity. The governments should enforce the labour laws and regulations in such a way that foreign investment will help workers as much as investors.
Political and Legal Risks
A foreign investor incurs political and legal risks while operating in politically unstable or weak legal systems countries. Reverses of government policies through expropriation nationalization or change of tax laws adversely affect foreign investments. Foreign direct investment in some countries is also heightened to become a costly burden on the company and risk factor through large levels of corruption and bureaucratic inefficiency.
Capital Flight and Financial Instability
Foreign portfolio investment in particular is expected to reverse quickly and flee capital to cause instability in financial markets. This results in the sharp decline of stock markets depreciation of the currency and even financial crises because of the sudden withdrawal of capital from foreign investors due to unfavourable economic news or market volatility.
Effects of Foreign Investment
Foreign investment affects the host countries both negatively and positively. The impacts may differ across sectors the nature of investments and specific policies and conditions of the host country.
Economic Growth and Development
Foreign investment has been one of the major stimuli and drivers for economic growth and development more so in developing countries. In this aspect foreign investments will bring capital into the country while also facilitating technology and expertise which will increase productivity create jobs and generally stimulate economic activity. FDI for instance tends to contribute more to the facets of economic growth than FPI because it lasts longer in the host country’s economy and is more directly involved with it.
Employment Generation
Employment generation will have the most direct positive impact on FDI. A huge number of new businesses factories and infrastructural projects would require investment through FDI. As a result these companies will provide jobs to the citizens of the host country. Additionally the potential for education and health services will also be facilitated as foreign direct investment allows for the actualization of the right to access and service from such sectors thus improving human capital.
Technology and Skill Transfer
Foreign investment can be a transfer of technology and knowledge from the investing country to the host country. It is a channel through which foreign investments may create new industries improve production processes or develop expertise locally. For example multinationals might engage in training and developing local employees so as to have a skilled workforce.
Trade and Export Expansion
Foreign investment can strengthen a nation’s trade and export capacity. Investment by foreign firms in export oriented sectors can greatly improve a nation’s access to overseas markets. This is particularly important for developing countries looking to diversify their economies and reduce their dependence on commodity exports.
Tax Revenue and Public Exchequer
Foreign investment can also complement the revenues generated by the host country’s government through taxes and revenue generating means. For example corporate income taxes importation and exportation duties and other fees that are payable by multinational corporations to the host country’s government can supplement the revenues.
The revenues generated from the foreign investment can be used to fund public services and develop infrastructure. Foreign investment is a very strong instrument of economic development provided the investment promotes proper distribution of benefits and reduces risks with the least negatives.
Investment Promotion
The policies created should make the environment business friendly. This will therefore include the relaxation of regulatory frameworks tax incentives and upgrading of infrastructure. IPAs can prove very useful in pushing investment opportunities into a country to foreign investors.
Stabilisation of Legal and Regulatory Framework
Attracting and retaining foreign investment requires a clear and predictable legal and regulatory framework. The government must enforce property rights contract laws and labour regulations so that foreign investors can operate in a fair and stable environment.
Developing Sustainable Investment
Governments should encourage foreign investors to invest in sustainable business that benefits both their economies and the environment. For example it could be through investment in renewable sources of energy green technologies and sustainable agriculture. The government can also promote and encourage CSR actions that are meant to help local communities.
Human Capital Development
The transfer of skills and technology is the greatest benefit of foreign investment. The government should therefore invest in education and training programmes to enable the local workforce to reap the employment and development opportunities offered by foreign investment effectively.
Risk Management
However the risks of foreign investment need to be coped with by the host countries very vigilantly. It may include diversification of sources of investments as well as capital controls related to sudden capital flight and even regulatory frameworks in some cases owing to the risk being related to environmental and social hazards.
Conclusion
Foreign investment has been one of the significant catalysts in the global economy. It has contributed significantly toward growth and development. Foreign investment offers a lot of incentives including jobs technology transfer and opening markets across the world. However foreign investment also faces some associated negative implications which include economic dependency environmental risks and labour rights concerns.
While effective policies that foster a favourable business environment ensure the fair distributive result of benefits and diminish the risks involved will enable host countries to take full advantage of foreign investment sustainable and responsible foreign investment will allow countries to utilise existing global capital flows as tools in obtaining long term economic development and prosperity.