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What are Foreign Investment Inflows?

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  • Written By: John Lister
  • Edited By: Kristen Osborne
  • Last Modified Date: 19 November 2016
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Foreign investment inflows occur when the total value of investment in a country by foreign organizations exceeds the total value of investment by organizations in the country into other countries. Generally, large foreign investment inflows indicate a strong national economy that is more attractive to overseas companies. Some countries offer incentives in order to try to increase foreign investment inflows.

There are two main types of foreign investment. Direct investment means specifically purchasing physical assets in a country, such as setting up a factory or building property. Indirect investment means buying financial assets in a foreign country such as stocks in local companies. Most measures of foreign investment inflows only deal with direct investment.

As a concept, foreign direct investment can encompass a variety of activities. As well as buying property and assets, a company could invest overseas in the form of sharing technology and knowledge, taking a management role, or taking part in a joint venture. Such activities don't always have a clear financial value and thus it can be difficult for overall nation figures to include them fully.

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When looking at inflow figures, it is important to check the context and definitions carefully, as there are two easily confused ways to describe the figures. One method is to use "inflow" to refer simply to the total amount of foreign investment in a country. Another method is to use "inflow" to both indicate that the amount coming in exceeds the amount going out, and to state the difference between the two. This latter method can be referred to as a net inflow to avoid confusion.

There are also several ways of interpreting inflow figures. One is to simply look at the total amount coming in, with a simple "bigger is better" attitude, remembering to take into account inflation. Another way is to look at the net inflow to see the overall pattern, usually with the attitude that more money coming in than going out is a sign of an attractive and competitive economy. Finally, rather than simply look at the raw difference between the incoming and outgoing money, an analyst might instead look at the proportional relationship between the two. This may give a more nuanced insight into the national economy's performance in a world context.

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