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What is a Foreign Investment? - Definition & Examples

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  • 0:00 What Is Foreign Investment?
  • 2:04 Examples of Foreign Stock
  • 3:29 Lesson Summary
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Lesson Transcript
Instructor: Aaron Hill

Aaron has worked in the financial industry for 14 years and has Accounting & Economics degree and masters in Business Administration. He is an accredited wealth manager.

Learn what a foreign investment is and some common examples that you can relate with. Find out about the different types of foreign investments and why companies and individuals invest in foreign countries.

What Is Foreign Investment?

Do you realize that the apartment building across the street could be owned by a company from another country? Your current or future employer may also be partially owned by a firm from Japan, Europe, or China. As the economies of nations become more global, and information and money can change hands easier, the popularity and level of foreign investments has dramatically risen over the last several decades.

Foreign investment is when a company or individual from one nation invests in assets or ownership stakes of a company based in another nation. As increased globalization in business has occurred, it's become very common for big companies to branch out and invest money in companies located in other countries. These companies may be opening up new manufacturing plants and attracted to cheaper labor, production, and fewer taxes in another country. They may make a foreign investment in another firm outside of their country because the firm being purchased has specific technology, products, or access to additional customers that the purchasing firm wants. Overall, foreign investment in a country is a good sign that often leads to growth of jobs and income. As more foreign investment comes into a country, it can lead to even greater investments because others see the country as economically stable.

Foreign investments can be split into direct and indirect investments. Direct investments are when companies make physical investments and purchases in buildings, factories, machines, and other equipment outside of their home country. Indirect investments are when companies or financial institutions purchase positions or stakes in companies on a foreign stock exchange. This type of investment isn't as favorable as direct investment because the home country can sell their investment very easily, on the next day if they choose. Direct investments are usually a longer-term investment in the economy of a foreign country. It's not nearly as easy to sell factories, machines, and buildings as it is to sell shares of stock.

Examples of Foreign Stock

Ford and General Motors factories - These two auto giants have foreign investments in dozens of countries all over the world. They have opened up factories and invested in machinery to produce vehicles in countries such as Brazil, Mexico, Vietnam, South Korea, and India. By investing in these other countries, they are able to increase their production, often save on labor costs, and can directly enter a market where they are looking to sell more vehicles.

Opening a franchise in Mexico or Canada - If you lived in the United States but wanted to cross the border to open up a new business, such as a Subway, Dunkin' Donuts, or Pizza Hut, you would be making a foreign investment. The purchase of the building or rent you paid, the hourly wages you paid the employees to work, and the machines and products you bought to operate your store in that country would all be foreign investments.

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