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The concept and composition of foreign direct investment

Foreign investment is a form of realization of long-term international movements of capital, which is divided into:

1. portfolio investments on which the exporter does not control or controlled companies abroad and foreign due to its only capital income (interest, dividends, profit sharing etc.)
2. direct investment, which places the investor abroad in order to gain control of the investee mostly on a long-term basis.

The investor thus contributes not only to the company’s profit but also to its possession to the extent that it can be operated, controlled or managed.

Foreign direct investment can be defined in several ways. According to the UN definition, they are investments, which are based on a long-term relationship and a lasting interest in an entity established in one country (a direct investor) for an entity located in another country.

The aim of the investor is to apply a considerable degree of influence on company management, which is based in another country of the investor.

Foreign direct investment involves both the initial transaction between the two entities, as well as all of the following transactions between them and associates.

According to the U.S. Department of Commerce for foreign direct investment can select all forms of foreign companies in which it holds a US citizen, company or group of 10% or more.

The definition, which was created for the needs of the balance of payments, says that foreign direct investment is a loan to a foreign enterprise or purchase of property in it if that company is majority-owned by residents of the investing country. As is clear from this and other definitions, foreign direct investment is not only the movement of funds but also the transfer of management experience, business secrets, technologies, rights to use the brand, know-how, marketing strategies and so on. It is typical for them to be associated with some degree of control.

It is not determined exactly what proportion of the owner of the company guarantees its control. Sometimes it does not even 100% ownership does not guarantee absolute control, if the company has to submit to restrictions of the government of the host country.

Most authors, however, stated a range of 10% to 25% as a precondition for the classification of direct investment.

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