Now that you understand the basic economic reasons why companies choose to invest in foreign markets, and what forms that investment may take, it is important to understand the other factors that influence where and why companies decide to invest overseas. These other factors relate not only to the overall economic outlook for a country, but also to economic policy decisions taken by foreign governments—aspects that can be very political and controversial.
The policy frameworks relating to FDIThis category 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. and FPIFPI is a category of investment instruments that are more easily traded, may be less permanent, and do not represent a controlling stake in an enterprise. These include investments via equity instruments (stocks) or debt (bondsA certificate issued by a government or company representing a promise by the bond issuer to pay the bondholder interest in addition to the principal amount of the bond after a specified period of time. For example, a 10-year bond purchased today costs . When you “redeem” or cash in the bond after ten years, the issuer repays the principal plus interest at a rate established when the bond was issued.) of a foreign enterprise that does not necessarily represent a long-term interest. are relatively similar, although there are a few differences.
Direct investors tend to look at a number of factors relating to how they will be able to operate in a foreign country:
- the rules and regulations pertaining to the entry and operations of foreign investors
- standards of treatment of foreign affiliates, compared to “nationals” of the host country
- the functioning and efficiency of local markets
- trade policy and privatization policy
- business facilitation measures, such as investment promotion, incentives, improvements in amenities and other measures to reduce the cost of doing business. For example, some countries set up special export processing zones, which may be free of customs or duties, or offer special tax breaks for new investors
- restrictions, if any, on bringing home (“re-patriating”) earnings or profits in the form of dividends, royalties, interest or other payments
The determinants of FPIFPI is a category of investment instruments that are more easily traded, may be less permanent, and do not represent a controlling stake in an enterprise. These include investments via equity instruments (stocks) or debt (bondsA certificate issued by a government or company representing a promise by the bond issuer to pay the bondholder interest in addition to the principal amount of the bond after a specified period of time. For example, a 10-year bond purchased today costs . When you “redeem” or cash in the bond after ten years, the issuer repays the principal plus interest at a rate established when the bond was issued.) of a foreign enterprise that does not necessarily represent a long-term interest. are somewhat more complex, however. Because portfolio investment earnings are more likely to be tied to the broader macroeconomic indicators of a country, such as overall market capitalization of an economy, they can be more sensitive to factors such as:
- high national economic growth rates
- exchange rate stability
- general macroeconomic stability
- levels of foreign exchange reserves held by the central bank
- general health of the foreign banking system
- liquidity of the stock and bond market
- interest rates
In addition to these general economic indicators, portfolio investors also look at the economic policy environment as well, and especially at factors such as:
- the ease of repatriating dividends and capital
- taxes on capital gains
- regulation of the stock and bond markets
- the quality of domestic accounting and disclosure systems
- the speed and reliability of dispute settlement systems
- the degree of protection of investor’s rights
Questions for Discussion:
- In what ways do the criteria for investing differ between FDIThis category 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. and FPIFPI is a category of investment instruments that are more easily traded, may be less permanent, and do not represent a controlling stake in an enterprise. These include investments via equity instruments (stocks) or debt (bondsA certificate issued by a government or company representing a promise by the bond issuer to pay the bondholder interest in addition to the principal amount of the bond after a specified period of time. For example, a 10-year bond purchased today costs . When you “redeem” or cash in the bond after ten years, the issuer repays the principal plus interest at a rate established when the bond was issued.) of a foreign enterprise that does not necessarily represent a long-term interest.? Which countries do you think are more favorable for investment, given these criteria? Do you think these criteria are good indicators for successful investment?
- What factors would you evaluate if you were an investor? Pretend you wanted to open a manufacturing plant to boost production of your wildly popular technological gizmo. What sorts of criteria would you evaluate in determining where to invest? Now pretend that you were looking for a short-term bond purchase for your company’s retirement plan. What factors would influence your decision to invest in this case?
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Controversies that may arise from host country policy decisions on these aspects of the investment environment will be covered in the following section of this Issue in Depth.
Next: Efforts to Increase International Investment
