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Questions and Answers
What distinguishes foreign direct investment from foreign portfolio investment?
How can foreign direct investment be made 'organically'?
Which activities are included in the broad definition of foreign direct investment?
What type of investment involves a notion of direct control?
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What does foreign direct investment encompass in a narrow sense?
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Foreign direct investment always involves the purchase of land and building in another country.
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Foreign direct investment can only be made inorganically by buying a company in the target country.
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Reinvesting profits earned from overseas operations is included in the broad definition of foreign direct investment.
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Foreign direct investment may be made 'organically' by expanding the operations of an existing business in the target country.
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Foreign direct investment always involves a controlling ownership in a business in another country.
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Study Notes
Distinction Between Investment Types
- Foreign Direct Investment (FDI) differs from Foreign Portfolio Investment (FPI) mainly in the level of control; FDI involves a significant degree of control over foreign assets, while FPI consists of investing in financial assets without direct management influence.
Organic Foreign Direct Investment
- Organic FDI refers to the growth and expansion of existing operations within a foreign country rather than acquiring established businesses; it allows for a more gradual increase in presence and influence in the market.
Activities Included in Foreign Direct Investment
- FDI encompasses various activities such as establishing new subsidiaries, joint ventures, or branches, expanding existing facilities, and reinvesting profits earned from overseas ventures.
Control in Foreign Investment
- Direct control on investments is associated with FDI as it involves a notion of ownership, where the investor has significant influence over management decisions and operations.
Narrow Definition of Foreign Direct Investment
- In a narrower sense, FDI is characterized by the acquisition of a lasting interest in a business enterprise in a foreign country, typically defined by holding at least 10% of the equity stake.
Land and Building Consideration
- FDI does not always require the purchase of land and buildings; these acquisitions may occur as part of the investment but are not a mandatory condition for foreign direct investment.
Inorganic Foreign Direct Investment
- Inorganic FDI refers to investments made by acquiring existing companies in the target country rather than developing new operations; this approach is typically faster but may not align with organic growth strategies.
Profit Reinvestment
- Reinvesting profits earned from overseas operations is a core component of the broad definition of FDI, reflecting the ongoing commitment and expansion of business activities in the foreign market.
Controlling Ownership
- FDI always involves a level of controlling ownership in a business in another country, indicating a strong interest and capability to influence management and operational decisions.
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Description
Test your knowledge of Foreign Direct Investment (FDI) with this quiz! Explore the concept of FDI, its impact on global economies, and the factors influencing FDI decisions. Gain insights into the complexities of international investments and enhance your understanding of this crucial aspect of global business.
