Foreign Investment In China Essay

3875 words - 16 pages

Foreign investment is the acquisition by residents of a country of assets abroad. There are two types of foreign investment, known as foreign direct investment (FDI) and foreign indirect investment (FII). By definition, FDI is defined as the acquisition by residents of a country of real assets abroad which includes acquiring of land, constructing buildings, mines or machinery, or buying existing foreign businesses. On the other hand, FII or portfolio investment is the acquisition of financial assets abroad, for example represent equity investments, debt investments, intergovernmental loans and bonds.There are significant differences between FDI and FII. Firstly, the objective of FDI is to gain managerial control of activities in the country of investment. Foreign owned enterprise would easily operate their activities in the host country and reduce other costs that might affect them if they perform their businesses from their home country. Contradictorily, FII objective is to gain short to medium term profits. Therefore, foreign investors would invest in a portfolio which expected to give them better returns in the future and hence lead to profit acquisition.The second difference is on the type of investors. Most of FDI is usually involve multinational corporations. These are the companies that operate, own and control production facilities in several foreign places. However, FII could be carried out by any individual or even speculators that would like to take an advantage of the foreign exchange.Thirdly, is the difference in terms of asset liquidity. FDI assets are highly illiquid because most of the investments are in terms of real assets and they cannot be sold quickly and the price they will fetch is very uncertain. However, FII are in terms of financial assets and are easily turned into money rapidly at a fair and predictable price and consequently, this type of investment is highly liquid.The fourth difference is in terms of the time period of investment. FDI has a primarily long term considerations. The reason is that, the foreign investors are not only investing funds to the host country, but also other assets such as factories, plants, facilities, and machines which are difficult to move from one country to another. Conversely, FII usually has short term investment goals since, the foreign investors would tend to speculate as soon as they realized that the currency of the host country depreciates or the currency of its home currency appreciates to a substantial value that would profit them.The fifth difference is on the activities of the two types of investment. For FDI involves activities of remitting money abroad to be spent on acquiring manufacturing, marketing, distribution, properties and services. For instance, the Fosters purchase of a brewery in Tianjin, is considered as Australian's foreign direct investment in China because there is a deficit item in Australia's capital and financial account, and a surplus item in China's...

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