When a domestic investor decides to purchase ownership of an asset in a foreign country, this is called foreign investment. To accomplish the deal, monetary flows from one country to another must happen. A foreign investor may influence the entity’s business strategy if the ownership position is large enough.

Foreign Investments Explained

On the other hand, large financial organizations typically invest in foreign companies to diversify their portfolio or gain new territory for one of their current investments. It is generally seen as a means to scale operations or trigger economic growth. One good example of this may be that certain companies may grow their presence abroad to acquire top talent and valuable business relationships. Goldman Sachs, J.P. Morgan, Morgan Stanley, and other large corporations might be given as examples. In other cases, companies may establish facilities or operations in specific countries to take advantage of cheaper labor or production expenses.

A practical example of Foreign Investment

Most factories are located in China and Bangladesh for retail production textile companies, such as H&M or Zara, even though most sales are concentrated in North America, where labor and material are much cheaper. As a result, outsourcing will result in a more significant profit margin. On other occasions, some large corporations choose to conduct business in countries with lower tax rates rather than to operate in countries with higher tax rates.

Multilateral Development Banks

Multilateral development banks (or simply development banks) are financial entities that fund development projects in countries in need of stimulating and stabilizing their economies. Multilateral development banks focus on supporting their individual country’s economic development rather than on profits. While infrastructure improvements such as toll roads and bridges in foreign countries rely on the financing of debt that pays very low to zero interest, an example of this concept may be infrastructure investments. By doing so, it encourages the emergence of new industries and business prospects in that region.

FDI may boost economic growth in host countries due to capital inflow and more tax income for the host country.  The host country’s trade regime is also one of the significant factors influencing an investor’s decision-making. Development-focused investors try to encourage host countries to funnel new direct investment into initiatives aimed at promoting development. According to proponents, competition from new businesses can contribute to productivity increases, greater efficiency at home, and better corporate governance standards at foreign entities.