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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 grants the loan and in the degree to which the investor is involved with the recipient of the loan.
FDIs occur 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 parent company’s subsidiary. Multinational corporations, which span multiple nations, often start with FDIs.
FPIs also occur when foreign investments are made by a company. They can also be done 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 easily traded investments. 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.
Foreign investment known as official flow occurs between nations and not between companies. In official flow cases, a more developed or economically prosperous nation will invest money in a less developed nation. A recipient nation of an official flow investment will normally receive financial support as well as high-end technology and governmental and economic management assistance.
A commercial loan is a type of foreign investment that typically takes the form of a bank loan. This type of investment can take place between nations or between companies that are in different countries. While a business loan can be made by an individual, it typically takes place between larger organizations.
Commercial loans were the most common type of foreign investment until the 1980s, especially in cases where investments went to companies and governments in economically developing countries. Since then, FPIs and FDIs have been much more common. The term globalization is commonly used to describe the phenomenon of increased use of IPFs and FDIs. While commercial loans are issued by banks and backed by a government, FPIs and FDIs are private investments.