IGNOU ECO 13 2017 2018 - Foreign Direct Investment and Portfolio Investment

Question

Foreign Direct Investment and Portfolio Investment

13 Feb 2018

Answer :

Word Count : 382

FDI is the net transfer of funds to purchase and acquire physical capital, such as factories and machines, e.g. Nissan, a Japanese firm, building a car factory in the UK.
In recent years, foreign direct investment has also widened to include the purchase of assets and shares which give investors a management interest in a firm.
The World Bank defines foreign direct investment as:
“Foreign direct investment are the net inflows of investment to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor. It is the sum of equity capital, reinvestment of earnings, other long-term capital, and short-term capital as shown in the balance of payments. ” (World Bank)
Foreign Direct Investment should be distinguished from portfolio transfers (e.g. moving financial capital to foreign bank accounts) this is known as indirect investment. (However, to complicate things,

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