International Investment - Its Different Forms

The term “foreign capital” is used to describe the different methods that a person can invest money in another country. Bonds, cash equivalents, and other assets are included in a portfolio investment, which is referred to as a group of assets. It can be controlled by the investor or financial professionals. It is referred to in economic studies as the scenario in which foreigners transfer money into a nation through bank deposits or by purchasing bonds and equities abroad. Foreign Portfolio Investment (FPI) and Foreign Direct Investment (FDI) are the two main categories of portfolio investments (FDI). We shall have a case study of a business venture into Japan and decide on the best portfolio investment to use.

International Investments

Foreign Portfolio Investment (FPI)

This refers to an equity investment where a company owns less than ten percent of the total shares. FPI enables the investor to buy bonds, stocks and any other monetary assets in another country. Its major limitation is that the investor cannot control the business or securities since they are not actively involved in the invest ruts. In spite of this, it is a good option for an investor who is need of fast returns and involves a lower risk compare to FDI (Xing, 2007).

Foreign Direct Investment (FDI)

Foreign direct investment (FDI) refers to placing of one’s interests by an individual or company in a foreign country by either buying assets in that country through acquisition of or control of investments in a foreign organization or by setting up business in that country. Foreign direct investments are different from foreign portfolio investments since in FPI an individual can only buy shares which do not exceed 10% in a foreign company. The main aspect of FDI is that there is tangible power over, or a say in the running of a foreign organization. FDI enables an investor to buy direct business ventures in foreign countries. For instance a financier residing in New York is able to acquire a warehouse located in Shanghai, China to enable a Chinese company to expand its enterprise. The main objective is to come up with a long-term source of returns while aiding the organization in improving on returns.

Open economies attract foreign direct investments. This is in contrast with economies which are highly regulated and growth prospects which are higher than the average to an investor. More often than not, foreign direct investment is characterized with more than capital input. It can include technology or management provision.

Factors affecting the choice between FDI and FPI

There is always a shortage of capital and it is always mobile. Therefore, there are various factors to consider before deciding on a foreign business venture, for FPI and FDI. They include:

Economic factors: these are those aspects which pertain to the general economy of the country. Examples include controls of foreign exchange, the country’s inflation rates, the economy’s strength, the currency stability, infrastructure and Gross Domestic Product growth trends.

Political factors: these include political stability, the regulations which concern entry and how foreign investors operate, general track record, etc. (Razin & Sadka 2012).

Motivations for foreign financiers: levels of taxation, tax and interest rates, amount of protection enjoyed by investors, rights to, etc.

Other factors: level of education, competition from local companies, business opportunities the labor force’s skills.

Policies that favour trade in Japan

In 1997, the loan policy by Japan Development Bank (JDB) to enhance foreign direct investment (FDI) in Japan also included organizations with a capital ratio that was higher than 50%. Also, in that year, due to the ”Emergency Economic Policy Package Reforming Japan for the 21st century”, the policies for special loans with low rates of interest which were offered by the Japan Development Bank were enhanced and accessible to every complete FDIs in Japan (Krugman, 2007).

In 1998, a report was issued by FIND about concrete criterion were put in place to improve the atmosphere for encouraging mergers and acquisitions. This included enhancement of information provision and betterment of legal/administrative procedures. There were also measures in place to deregulate the mergers and acquisitions (M&A) market in Japan. The Japan Regional Development Corporation (JRDC) and the Japan Industrial Location Center were established and started to provide data concerting industrial locations in Japan.

Conclusion

It is sensible to conclude that FDI is a better option compared to FPI since it aims at long-term gains. It also allows the investor to have more control of the company and is more stable. However, for an upcoming economy, tangible amounts of FDI will be visible if foreign investors believe that it will continue to grow and have faith in the government. As much as FPI has a promise of fast returns, its stability is very low hence long-term profits are not attained. It is therefore a good option when venturing into business into developing countries.

Recommendation

Japan is a developed country with proper business infrastructure and favourable policies. It is therefore recommendable that the company Rocky Mountain Chocolate Factory International (RMCF) pursues the FDI option when expanding its business operations into japan.

References

Xing, Y. (2007). Foreign direct investment and China’s bilateral intra-industry trade with Japan and the US. Journal of Asian Economics, 18(4), 685-700.

Krugman, P. (Ed.). (2007). Trade with Japan: has the door opened wider? University of Chicago Press.

Hattari, R., & Rajan, R. S. (2011). How Different are FDI and FPI Flows?; Distance and Capital Market Integration. Journal of Economic Integration, 499-525.

Razin, A., & Sadka, E. (2012). Foreign direct investment: analysis of aggregate flows. Princeton University Press.