Economics – Relationship between countries at different levels of development | e-Consult
Relationship between countries at different levels of development (1 questions)
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Foreign Direct Investment (FDI): As defined previously, FDI involves a direct investment in a foreign company with the aim of controlling its operations. It's a more active and involved form of investment.
Portfolio Investment: Portfolio investment involves purchasing financial assets (like stocks and bonds) in a foreign country without seeking to control the underlying business. Investors are primarily concerned with financial returns, not operational control. Portfolio investments are typically liquid and can be easily bought and sold.
Examples:
- FDI Example: A US car manufacturer building a new factory in Germany to produce vehicles for the European market. The US company owns and controls the German factory's operations.
- Portfolio Investment Example: A British pension fund buying shares in a Japanese company on the Tokyo Stock Exchange. The pension fund receives dividends and capital gains, but has no say in how the Japanese company is run.
Key Differences Summarized:
| Feature | FDI | Portfolio Investment |
| Control | Direct control over operations | No control over operations |
| Investment Type | New or expanded business operations | Purchase of financial assets (stocks, bonds) |
| Risk | Higher risk, longer-term commitment | Lower risk, shorter-term commitment |