Discuss the merits of foreign direct investment, portfolio investment and short term investment.

 FDI or Foreign Direct Investment is considered as a form of investment that earns interest in enterprises which function outside of the domestic territory of the investor. FDI requires a business association between a parent company and its foreign subsidiary. Foreign direct business relationships give rise to multinational corporations.

For an investment to be regarded as an FDI, the parent firm needs to have at least 10% of the ordinary shares of its foreign affiliates. The investing firm may also qualify for an FDI if it owns voting power in a business enterprise operating in a foreign country.

Foreign Direct Investment (FDI) is also defined as a company from one country making a physical investment into building a factory in another country. Its definition can be extended to include investments made to acquire lasting interest in enterprises operating outside of the economy of the investor.

The FDI relationship consists of a parent enterprise and a foreign affiliate which together form a Multinational Corporation (MNC). An outward-bound FDI is backed by the government against all types of associated risks. This form of FDI is subject to tax incentives as-well-as disincentives of various forms.

Risk coverage provided to the domestic industries and subsidies gran the local firms stand in the way of outward FDIs, which are also known as “direct investments abroad.” Different economic factors encourage inward FDls. These include interest loans, tax breaks, grants, subsidies, anu un removal of restrictions and limitations. Factors detrimental to the growth of FDIs include necessities of differential performance and limitations related with ownership patterns.

Portfolio investment represents passive holdings of securities such as foreign stocks, bonds, or other financial assets, none of which entails active management or control of the securities’ issuer by the investor where such control exists, it is known as foreign direct investment. Portfolio investment consists of international equity and debt securities not classified to either direct investment or reserve assets.

Some examples of portfolio investment are

• Purchase of shares in a foreign company. 

• Purchase of bonds issued by a foreign government.

• Acquisition of assets in a foreign country.

Short-term investments involve securities with a maturity period of less than a year. Also, these short-term investments are vulnerable in nature as a part of capital account, so much so that several tiger economies of Asia are improvised during 1997-98. And this was consequent to massive withdrawal of foreign investments.

This limits the extent of damage to Indian economy. FDI is investment in productive assets, not financial assets. It does not include short-term flows of money, such as portfolio investments and foreign exchange dealings.

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