Topic attracting foreign investment into the national economy the meaning of the topic

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Self-study on topic 4 Foreign inv

The meaning of the topic: The role of foreign investment in the modernization and technical re-equipment of the country. Conditions for attracting foreign investors. Foreign economic activity of foreign investors. Position and structure of attraction.

Factors affecting the investment climate in Uzbekistan.

Task# 4.1

  1. Write about the following topic.

Today, people think that attraction of foreign investment is necessary and important for the development of the economies of the host countries, while the others think that attraction of foreign investment has negative impact on the society and not only on this sphere. Discuss both sides and write your own opinion.

Give reasons for your answer and include any relevant examples from your own knowledge or experience.

Write at least 250 words.

  1. Write about the following topic.

Government bodies support foreign direct investment, while the other subjects of investment activity think that attraction of foreign investment should be in the form of portfolio investment. Discuss both sides and give your own opinion.

Give reasons for your answer and include any relevant examples from your own knowledge or experience.

Write at least 250 words.

Advantages for the company investing in a foreign market include access to the market, access to resources, and reduction in the cost of production. Disadvantages for the company include an unstable and unpredictable foreign economy, unstable political systems, and underdeveloped legal systems.

The general state of the host economy, its economic, legal and political stability, and its size, its geographical location and its relative factor endowment, that is FDI-incentives in a broader sense, are the most important factors for attract- ing foreign investors.

Foreign investment involves capital flows from one country to another, granting extensive ownership stakes in domestic companies and assets. Foreign investment denotes that foreigners have an active role in management as a part of their investment.

Investing in foreign markets has never been more accessible, especially for individual investors. But regardless of how highly international investing is recommended by financial experts, many investors are still skeptical when it comes to shipping their money overseas.
Many industry experts have come to the conclusion that the main reasons individuals fear international investment are the cultural barriers and foreign regulations. These are still issues that investors have to deal with at some point. However, holding at least a few foreign stocks helps with portfolio diversification. Moreover, it reduces volatility and raises the potential for financial growth.
Investing in foreign markets does not come free of risks. However, there are some ways it can turn into a profitable business.
What Are the Benefits of Foreign Investments?

The main rule of investing is finding the highest risk-adjusted capital return. Broadly speaking, an individual would seek to invest in a business where the profit is bigger than the overall risk taken.
This is why diversification has proven to be one of the best ways to enhance risk-adjusted returns. It is believed that a diversified portfolio should hold at least eight uncorrelated assets that are spread across multiple areas, both industry-wise and geography-wise. Uncorrelated assets are those assets that are in no way related and do not influence one another. This means that in the eventuality of one investment failing, it will not affect the entire portfolio. Investing in foreign countries adds to geographical diversification and improves stability.
Experts believe that one of the biggest mistakes investors make is to ignore the opportunities outside of their country. This includes small investors also, who don’t think they have portfolio sizable enough to include foreign investments. So index funds come to the aid of small investors by offering diversified foreign exposure.
Developing Countries Have Much to Gain

However, the advantages of foreign investment are not one-sided, as developing countries have a lot to gain from opening their gates to international investors. For example, they gain new job opportunities for locals and easier access to new technological advancements.
Consider the relationship between China and Israel, wherein Israel has become China’s third largest trading partner worldwide. Overall, both countries have had a lot to gain from this relationship.
The most important thing for a developing country is to understand the benefits a big investor such as China can bring. “Israel is far ahead of any other country … in recognizing the importance of Chinese investment and cultivating commercial ties inside China,” says Dorian Barak, private investor and CEO of Indigo Global.
Learn the Best Ways of Making International Investments

The key in foreign investments is finding the specific industries that one country is most focused on. For example, the Middle East is famous for its oil and gas industry. On the other hand, Chile is known for its rare minerals. There are multiple other industries that are constantly growing in all areas of the world. Therefore, investing in something that has a long history and growth potential in an area is more secure and lowers investment risks.
There are multiple ways of investing to diversify the financial portfolio. Exchange-traded funds (ETFs) are one of the most popular ways of investing in foreign markets. Along with mutual funds, ETFs add to portfolio diversity. That’s because they hold a basket of international stocks and bonds that investors can gain access to with just one transaction.
There are many different types of ETFs, depending on the area of the investments. For example, there are as international funds, regional funds, country funds, and sector funds.
International funds rely on investing broadly across multiple countries outside of the investors’ area of development. Regional funds focus on investing in specific regions, such as Asia or the Middle East. Country funds invest in specific countries, like Russia or Spain. Sector funds focus on investments in a particular sector, such as energy or gold, but spread across multiple countries that rely on that industry.

What Fund Type Is Best?

With all the available options for foreign investments, there comes the rising question of what fund type is the best. The answer depends on the objectives and risks an individual is willing to take.
Financial advisors usually recommend that younger investors choose funds that have a higher risk but offer the potential for bigger returns. Meanwhile, older investors should seek lower-risk funds that can provide them more stability. The general advice is that, no matter the choice, the funds should meet an investor’s objectives and risk appetite.
There are typically two ways investors can gain direct access to foreign stocks. One way is to open a global account with a broker in their country that provides the ability of buying foreign shares. Alternatively, they can open an account with a local broker from the targeted country that provides services for foreign investors.
The Risks of Investing in International Markets

All investments hold risks, and the foreign market is no exception. This is exactly why experts recommend creating a diversified portfolio. If, for example, the economy or currency of a country is starting to spiral downward due to poor governmental decisions, an individual’s other investments won’t be affected.
But just like domestic investments, foreign investments come with some risks. For example:
Currency Exchange Rate

Most foreign investments generate capital in their local currency. This means that investors need to convert these currencies at some point. With the exchange rate fluctuating over time, this can lead to substantial gains or losses.

foreign investments

Geopolitical Risks

Many developing countries face geopolitical risks, such as hostile neighbors or terrorism that can influence the country’s economy.
Economic Risks

While some countries have a stable economy, developing countries may face economic events that can seriously affect the companies that are operating within them. That’s because foreign companies often depend on their host country’s economy.
Is Foreign Investing Worth the Risk?

With all the variables involving foreign markets, investors must ask themselves: Is international investing really worth the risk?
The answer depends on the area of interest. Some countries thrive in a particular industry and have remained global leaders throughout the years. For example, consider China in regard to technological development. China’s great strides in this area make technological investment decisions in China quite sound.
Other countries, such as Denmark, Sweden and Norway, have developed more toward the financial and healthcare industries. That makes these sectors more stable and easier to approach in those countries.
No matter the niche, experts recommend having at least 20% of your portfolio allocated toward international investments. Then you can increase the percentage over time, depending on market capitalization changes.


Investment: An Overview

Foreign investment, quite simply, is investing in a country other than your home one. It involves capital flowing from one country to another and foreigners having an ownership interest or a say in the business. Foreign investment is generally seen as a catalyst for economic growth and can be undertaken by institutions, corporations, and individuals.

When making foreign investments, investors have to consider economic factors as well as other risk factors, such as political instability and currency exchange risk. These factors can be used to decide if an investment should be direct or through a portfolio.
Foreign Direct Investment

Foreign direct investment (FDI) involves establishing a direct business interest in a foreign country, such as buying or establishing a manufacturing business, building warehouses, or buying buildings.1
Foreign direct investment tends to involve establishing more of a substantial, long-term interest in the economy of a foreign country.1 Due to the significantly higher level of investment required, foreign direct investment is usually undertaken by multinational companies, large institutions, or venture capital firms. Foreign direct investment tends to be viewed more favorably since they are considered long-term investments, as well as investments in the well-being of the country itself.

At the same time, the nature of direct investment, such as creating or acquiring a manufacturing facility, makes it much more difficult to liquidate or pull out of the investment. For this reason, direct investment is usually undertaken with essentially the same attitude as establishing a business in one's own country—with the intention of making the business profitable and continuing its operation indefinitely. Direct investment includes having control over the business invested in and being able to manage it directly, but it also involves more risk, work, and commitment.
Foreign Portfolio Investment

Foreign portfolio investment (FPI) refers to investing in the financial assets of a foreign country, such as stocks or bonds available on an exchange. This type of investment is at times viewed less favorably than direct investment because portfolio investments can be sold off quickly and are at times seen as short-term attempts to make money, rather than a long-term investment in the economy.
Portfolio investment typically has a shorter time frame for investment return than direct investment. As with any equity investment, foreign portfolio investors usually expect to quickly realize a profit on their investments.

Unlike direct investment, portfolio investment does not offer control over the business entity in which the investment is made.

As securities are easily traded, the liquidity of portfolio investments makes them much easier to sell than direct investments. Portfolio investments are more accessible for the average investor than direct investments because they require much less investment capital and research.

Foreign direct investment is building or purchasing businesses and their associated infrastructure in a foreign country.

Foreign portfolio investment is purchasing securities of foreign countries, such as stock and bonds, on an exchange.

Direct investment is seen as a long-term investment in the country's economy, while portfolio investment can be viewed as a short-term move to make money.

Direct investment is likely only suitable for large corporations, institutions, and private equity investors.

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Related Terms

Making Money Abroad: How Foreign Portfolio Investment (FPI) Works

Foreign portfolio investment (FPI) is securities and other assets passively held by foreign investors, allowing individuals to invest overseas. more

Foreign Direct Investment (FDI)

Foreign direct investment (FDI) is an investment made by a company or entity based in one country into a company or entity based in another country. more

Foreign Investment

Foreign investment involves capital flows from one nation to another in exchange for significant ownership stakes in domestic companies or other assets. more

Capital Flight Definition

Capital flight includes an exodus of capital from a nation, usually during political or economic instability, currency devaluation or capital controls. more

Emerging Market Economy Definition

An emerging market economy is one in which the country is becoming a developed nation and is determined through many socio-economic factors. more

Inward Investment

An inward investment involves an external or foreign entity either investing in or purchasing the goods of a local economy. more

Foreign Direct Investment (FDI) vs Foreign Portfolio Investment (FPI) ... The real difference between the two is that while FDI aims to take control of the company in which investment is made, FPI aims to reap profits by investing in shares and bonds of the invested entity without controlling the company.25-sen, 2016

A foreign direct investment (FDI) is an investment made by a firm or individual in one country into business interests located in another country. Foreign portfolio investment (FPI) instead refers to investments made in securities and other financial assets issued in another country.9-dek, 2019

Portfolio investments are investments in the form of a group (portfolio) of assets, including transactions in equity, securities, such as common stock, and debt securities, such as banknotes, bonds, and debentures

The real difference between the two is that while FDI aims to take control of the company in which investment is made, FPI aims to reap profits by investing in shares and bonds of the invested entity without controlling the company.

What is Foreign Direct Investment (FDI)?
FDI is investment by non-resident entities like MNCs to carryout business operations in India with management of investment, production of goods or services, employing people and marketing their products. In FDI, both the ownership and control of the firm is with the investor. The foreign investor usually takes a considerable stake or shareholding in the company and exerts management influences completely or partially, depending on his shareholding.
What is Foreign Portfolio Investment?
FPI on the other hand is investment in shares, bonds, debentures, etc. According to the IMF, portfolio investment is defined as cross-border transactions and positions involving debt or equity securities, other than those included in direct investment or reserve assets.
FDI vs. FPI: Of the two, FDI is more desirable
FDI means real investment; whereas FPI is monetary or financial investment –Here, FDI means the investor makes investment in buildings and machineries directly in the company in which he has made the investment. FPI doesn’t create such productive asset creation directly. It is just financial investment. FDI is certain, predictable, takes production risks, have stabilizing impact on production. It directly augments employment, output, export etc. The major merit of FDI is that it is non debt creating as well as non-volatile (less fluctuating).
FPI on the other hand is investment aimed at getting profits from shares, interests from deposits etc. It is otherwise known as hot money. The portfolio investors stays his money in the capital market only for a short period of time. Its destination period is so small and is empirically considered as fluctuating (often short term) capital. It is highly volatile, a fair weather friend, speculative, involves exchange risks and may lead to capital flight and currency crisis affecting real economic variables. It is destabilizing in the foreign exchange market. Fluctuations in the mobility of FPI affects foreign exchange rate, domestic money supply, value of rupee, call money rates, security market etc. FII (Foreign Institutional Inflows) inflows depend on two factors: first, return potential of the destination market (host country) and second availability of risk capital at source geographies (home market; countries like the US). A change in environment in any of these will result in quick reversal of the flows.
If FDI is certain, long term and less fluctuating, FPI is speculative, highly volatile and un-predictive. Hence, FDI is superior to FPI.

While some prefer to invest in domestic opportunities, others are more likely to invest their money abroad. With foreign direct investment, or FDI, an investor will establish a direct business interest in a foreign country, whereas with foreign portfolio investment, or FPI, an investor will purchase assets like stocks or bonds in a foreign country.
Foreign direct investment
FDI typically means forming a long-term interest in the success of another company. An example of FDI would be an investor purchasing a factory or warehouse so that a growing company in a foreign country can expand its operations. The intent with FDI is typically to help make a business more profitable and generate a return on investment based on that company's long-term success.
Foreign portfolio investment
Whereas FDI involves an investment in a foreign business, FPI involves the purchase of securities that can be easily bought or sold. The intent with FPI is generally to invest money into another country's stock market with the hope of generating a quick return.
While FDI and FPI both involve putting money into a foreign country, the two investment options differ considerably. With FDI, investors are able to exert control over their investments and are typically actively involved in the management of the companies they invest in. With FPI, investors do not get a say in how their investments pan out because they're not actively involved in the management or operations of the companies they're invested in. Rather, those who take an FPI approach are just like individual U.S. stockholders who generally don't get to make business decisions on behalf of the companies whose stocks they own.
Another significant different between FDI and FPI is that investors with an FDI approach are generally willing to be in it for the long haul. Because it can take time to build up a company, those who go the FDI route typically need to be patient in order to see a return on the money they put in. With FPI, investors tend to take a shorter-term approach.
Finally, FPI is generally considered to be a more liquid and less risky investment option than FDI. Because foreign securities are traded regularly, an investor looking to liquidate a foreign portfolio can sell off assets like stocks or bonds with relative ease. With FDI, investment dollars are more intricately tied up in a specific business, which makes it harder for investors to exit their positions.
When deciding whether to take an FDI or FPI approach, investors should consider their appetite for risk and timeframe for seeing a return on investment. Additionally, investors should consider other factors that might make investing in a foreign country a more dangerous prospect, such as political upheaval and currency exchange risk.
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