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In an increasingly globalized world, foreign investment is a powerful force in most nations’ economies. Investors act to take advantage of lucrative investment opportunities abroad, while governments that wish to bolster their economies enact policies to make their countries attractive to foreign investors. When a country brings in investment from abroad, it is inward foreign investment. When an investor from the country makes an investment abroad, it is known as outward foreign investment. Every foreign investment is both inward and outward, depending on the country from whose perspective it is discussed.
The term "foreign investment" refers to any investment in which one entity acquires assets based outside his home country. Foreign investments can take the form of real estate or stocks. Often, companies make foreign investments by buying stock in foreign companies. When they build up enough stock, the foreign company becomes a subsidiary. The company that made the investment is known as the parent company.
The major distinction between types of foreign investment is between outward foreign investment and inward foreign investment. The attitude of governments is markedly different toward the two. They generally seek to draw in inward foreign investment by offering favorable conditions to investors. Governments want to promote their domestic economies, so they may try to discourage outward foreign investment to keep funds inside the country.
Outward foreign investment can be further divided into horizontal and vertical investment. When a firm engages in horizontal foreign investment, it expands the activities in which it already participates to other markets. For example, a company that makes cookies might purchase stock in a foreign cookie company, acquiring controlling interest and turning the foreign company into a subsidiary of the investing company. Vertical investment means that the company invests in a different segment of the chain of production and distribution. If the cookie company wanted to get better prices on ingredients, it might turn a foreign flour mill into a subsidiary; if it had trouble selling cookies, it might acquire a chain of foreign retail stores.
Investors often look to outward foreign investment as an indicator of the health and stability of a country’s economy. When countries are unstable or have poor economies, they generate little if any outward foreign investment. Instead, they try to get as much inward foreign investment as possible to stimulate their economies. Once the economy is functioning, people build up wealth and companies grow to the point at which they start looking at expansion opportunities in other markets. Only then does the country have outward foreign investment.
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