Direct versus Portfolio Investments. Clearly identify the differences between a direct foreign investment and portfolio foreign investment? Give an example of each. Which type of investment is a multinational industrial company more likely to make and support your position?
Countries require both external and internal sources of capital for their economic growth. Thus, foreign portfolio investment (FPI) and foreign direct investment (FDI) are methods of investing in an economy. However, the two approaches differ in the following ways. FDI involves establishing a business in a foreign country such as buying a manufacturing company through acquisitions or mergers (Humanicki, Kelm, and Olszewski, 2013). On the other hand, FPI involves investing in financial assets such as bonds and stock. Another difference is that investors of FDI are interested in the management of the company they invest in, unlike FPI investors. Therefore, FDI investors are more aware of changes in the project compared to FPI investors. Besides, Zopounidis, Christopoulos, and Kalantonis (2018) stated that FDI requires high levels of investment hence it establishes a long term interest in the economy of a foreign country. On the contrary, FPI is short-term because investors expect quick returns.
The most effective investment for a multinational company is FDI. According to Humanicki et al. (2013), investing in FDI will enable the company to exert control over its investments. For instance, through being involved in the management of the company acquired. Also, FDI is less risky compared to FPI. Also, the multinational company can sue the local organization in which it has invested in case of breach of contract or misconduct of business operations. Moreover, FDI involves the transfer of technology, funds and other resources between organizations (Zopounidis et al., 2018). Thus, FDI would enable the foreign company to be more innovative and acquire unique resources which is a competitive advantage.
Humanicki, M., Kelm, R., & Olszewski, K. (2013). Foreign Direct Investment and Foreign Portfolio Investment in the contemporary globalized world: should they be still treated separately?
Zopounidis, C., Christopoulos, A. G., & Kalantonis, P. (2018). Perspectives, trends, and applications in corporate finance and accounting. Hershey, PA: Business Science
by EssayRoyal, Dec. 8, 2019, 5:55 p.m.