NATURE AND TYPES OF INTERNATIONAL INVESTMENT

The growing international production and trade require increased amount of international investment. As a result, the flow of international investment has been increasing. The country requires international investment for enhancing the production, trade and distribution capabilities. The need for international investment is more pronounced in the developing countries where the capital is in scarce. World Investment Report, 1999 has advocated the need of foreign investment. It says that the development priorities of developing countries include achieving sustained income growth for their economies by raising investment rates, strengthening technological capacities and skills, and imposing the competitiveness of their exports in world markets, distributing the benefits of growth equitably by creating more and better employment opportunities, and protecting and conserving the physical environment for future generations. The international investment plays an important role in the above effort of the developing countries. There are two major types of international investment. They are Foreign direct Investment and Portfolio Investment. Let us first learn about them.

Foreign Direct Investment 

Foreign Direct Investment occurs when an investor based in one country (the home country) acquires an asset in another country (the host country) with the interest to manage the asset. The company investing in this country also transfers assets such as technology, management and marketing. Further, the investing company also seeks the power to exercise control over decision making in a foreign enterprise - the extent of which has to vary according to its equity participation. Foreign Direct Investment also includes reinvested earnings which comprise the direct investor's share of earnings not distributed as dividends by affiliates or earnings not remitted to the direct investor. Such retained profits of affiliates of foreign enterprise are reinvested.

Recent1 y there has been tremendous expansion of FDI. There are four main characteristic features of growth of foreign direct investment. These are: 

The bulk of investment flows is among the developed countries. 

The growth of investment has been substantial. 

The developing countries have increasingly become recipients of FDI. 

The flow of FDI to developing countries, however, is concentrated in approximately ten countries.

Foreign Direct Investment especially in developing countries has been a very controversial subject. Historically, FDI is associated with the domination of metropolitan powers over the colonies. It was believed that these investments were instruments of suppression of national enterprises and exploitation of these economies for the benefit of foreign investors. However over the years this historical assessment has given place to an important role to FDI. A consensus has developed since the eighties that FDI is essential for economic development.

Portfolio Investment 

Portfolio capital normally moves to investment in financial stocks, bonds and other financial instruments. Further, the portfolio capital moves to the recipient country which has revealed its profitability and has a comparative advantage over the counterparts in investing country. Portfolio capital unlike FDI is affected largely by individuals and institutions through the mechanism of capital market. Portfolio investment to a large extent is expected to be speculative and footloose in its character. Very often depending on the confidence of the investor, the investment is made. In the event this confidence is shaken, the capital has a tendency to shift from one country to another very fast occasionally creating a crisis for the host country.

Equity capital is the value of the Multinational Corporations (MNCs) investment in shares of an enterprise in a foreign country. An equity capital stakes of 10 per cent or more of the ordinary shares or voting power in an incorporated enterprise is normally considered threshold for the control of assets. This category includes both mergers and acquisitions and green field investments (the creation of new facilities). Mergers and acquisitions are important sources of investment in developed countries. .

Mergers and acquisitions are a popular mode of investment for firms wishing to project, consolidate and advance their global competitive positions by selling off divisions that fall outside the scope of their core competence and acquiring strategic assets that enhance their competitiveness. For these firms, the "ownership” assets acquired from another firm, such as technical competence, established brand names and existing supply networks and distribution systems can put to immediate use towards serving global customers, enhancing projects, expanding market share and increasing corporate competitiveness by employing international production network more efficiently.