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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 makes the loan and the degree to which the investor is involved with the recipient of the loan.
FDI occurs when a company invests in a company located in another country. For a foreign private investment to be considered an FDI, the investing company must have at least 10% of the shares owned by the foreign company. In these international business relationships, the investing company is known as the parent company, while the foreign company is known as the subsidiary of the parent company. Multinational corporations, spanning multiple nations, often start with FDI.
FPIs also occur when a company makes foreign investments. They can also be made by an individual who owns mutual funds. While an FDI allows the investing company to own shares in the subsidiary, an FPI can be more temporary. Investment instruments such as stocks and bonds are typically traded on FPIs. Stocks and bonds are examples of easy investments to trade. A company that owns shares and bonds in a foreign company does not necessarily have a stake in the company in which it is investing.
The foreign investment known as official flow occurs between nations and not between companies. In cases of official flow, a more developed or economically prosperous nation will invest money in a less developed nation. A nation receiving an official flow investment will typically receive financial support, as well as state-of-the-art technology, economic and government management assistance.
A business loan is a type of foreign investment that typically takes the form of a bank loan. This type of investment can occur between nations or between companies located in different countries. While a business loan can be made by an individual, it is usually between larger organizations.
Commercial loans were the most common type of foreign investment until the 1980s, especially where the investments went to companies and governments in economically developing countries. Since then, FPIs and IDFs have been much more common. The term globalization is commonly used to describe the phenomenon of increased use of IPF and FDI. While business loans are issued by banks and backed by a government, FPIs and FDIs are private investments.