INTERNATIONAL CAPITAL FLOWS

Foreign direct investment (FDI) is a direct investment into production or business in

a country by an individual or company in another country, either by buying a
company in the target country or by expanding operations of an existing business in
that country. Foreign direct investment is in contrast to portfolio investment, which
is a passive investment in the securities of another country such as stocks and
bonds.

Entities making direct investments typically have a significant degree of influence

and control over the company into which the investment is made. Open economies
with skilled workforces and good growth prospects tend to attract larger amounts of
foreign direct investment than closed, highly regulated economies.

The investing company may make its overseas investment in a number of ways -
either by setting up a subsidiary or associate company in the foreign country, by
acquiring shares of an overseas company, or through a merger or joint venture.

The accepted threshold for a foreign direct investment relationship, as defined by

the OECD, is 10%. That is, the foreign investor must own at least 10% or more of the
voting stock or ordinary shares of the investee company.
FDI- Foreign Direct Investment refers to international investment in which the
investor obtains a lasting interest in an enterprise in another country.

Most concretely, it may take the form of buying or constructing a factory in a foreign
country or adding improvements to such a facility, in the form of property, plants, or
equipment.

FDI is calculated to include all kinds of capital contributions, such as the purchases of
stocks, as well as the reinvestment of earnings by a wholly owned company
incorporated abroad (subsidiary), and the lending of funds to a foreign subsidiary or
branch. The reinvestment of earnings and transfer of assets between a parent
company and its subsidiary often constitutes a significant part of FDI calculations.

FDI is more difficult to pull out or sell off. Consequently, direct investors may be
more committed to managing their international investments, and less likely to pull
out at the first sign of trouble.

On the other hand, FPI (Foreign Portfolio Investment) represents passive holdings of
securities such as foreign stocks, bonds, or other financial assets, none of which
entails active management or control of the securities' issuer by the investor.

Unlike FDI, it is very easy to sell off the securities and pull out the foreign portfolio
investment. Hence, FPI can be much more volatile than FDI. For a country on the
rise, FPI can bring about rapid development, helping an emerging economy move
quickly to take advantage of economic opportunity, creating many new jobs and
significant wealth. However, when a country's economic situation takes a downturn,
 sometimes just by failing to meet the expectations of international investors, the
large flow of money into a country can turn into a stampede away from it.

Improve this FDI FPI

chart
Involvement - Involved in management No active involvement in management.
direct or and ownership control; Investment instruments that are more easily
indirect: long-term interest traded less permanent and do not represent a
controlling stake in an enterprise.
Sell off: It is more difficult to sell It is fairly easy to sell securities and pull out
off or pull out. because they are liquid.
Comes from: Tends to be undertaken Comes from more diverse sources e.g. a small
by Multinational company's pension fund or through mutual
organizations funds held by individuals; investment via equity
instruments (stocks) or debt (bonds) of a
foreign enterprise.
What is Involves the transfer of Only investment of financial assets.
invested: non-financial assets e.g.
technology and
intellectual capital, in
addition to financial
assets.
Stands for: Foreign Direct Investment Foreign Portfolio Investment
Volatility: Having smaller in net Having larger net inflows
inflows
Management: Projects are efficiently Projects are less efficiently managed
managed

Foreign portfolio investment is the entry of funds into a country where foreigners
make purchases in the countrys stock and bond market, sometimes for speculation.

It is a usually short term investment (sometimes less than a year, or with

involvement in the management of the company), as opposed to the longer term FDI
partnership (possibly through joint venture), involving transfer of technology and
know-how. For example, Ford Motor Company may invest in a manufacturing plant
in Mexico, yet not be in direct control of its affairs. Foreign Portfolio Investment
(FPI): passive holdings of securities and other financial assets, which do NOT entail
active management or control of the securities issuer. FPI is positively influenced by
high rates of return and reduction of risk through geographic diversification. The
return on FPI is normally in the form of interest payments or non-voting dividends.

In some cases, these types of investments are short-term in nature, allowing the
investor to quickly take advantage of favorable exchange rates to buy and sell the
assets. At other times, the foreign portfolio investment is acquired with plans of
holding onto the asset for an extended period of time.
In many ways, a foreign portfolio investment is no different from purchasing
investments that are domestic in nature. Investors will consider the financial
condition of the entity that is issuing the investment, gauge the potential for
that investment to generate returns over a specific period of time, and consider
what type of events could occur that would have a negative impact on the growth
potential of that holding. Consideration of the ease of trading the asset when and as
desired will also be a factor that investors will assess before choosing to make the
purchase.
There are several characteristics that tend to define the nature of a foreign portfolio
investment. Typically, the investor has no desire to be actively involved within the
management of the asset. In addition, the investment will not provide the investor
with a controlling interest in the issuing company. While the number of
shares acquired may be significant, the shares will not position the investor so that
he or she has a great deal of control over how the issuer conducts business. Along
with the somewhat hands-off nature of a foreign portfolio investment, there may
also be certain tax requirements that the investor has to both the nation in which
the assets are based and his or her own home country.
Under the right circumstances, a foreign portfolio investment can be an excellent
way to generate a decent amount of return in relatively little time. This is sometimes
managed by paying close attention to current conditions in the foreign exchange
market. If the investor can use the right currency to make the purchase, then sell
that same investment when exchange rates are in his or her favor, there is the
chance to not only earn returns from the upward movement of the investment itself,
but also from the current rate of exchange between the two currencies involved.
While this type of strategy does require careful timing of both the purchase and the
sale, the end result can be well worth the time and effort.
Regulation of International Investment is done through national investment policy,
bilateral agreements and regional agreements. National investment policy includes
export stimulating policy and import substitution policy.

Every country has some special regimes, applying to all investments. Here is the
common ones: Preferential regime, National regime, Fair and equitable regime and
transparency regime.

INVESTMENT CLIMATE is the economic and financial conditions in a country

that affect whether individuals and businesses are willing to lend money and
acquire a stake in the businesses operating there.