Foreign portfolio investment
represent passive holding 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 .Modern finance theory suggests that foreign
portfolio investments will be motivated by attempts to seek an attractive rate
of return as well as the risk reduction that can come from geographically
diversifying one’s investment portfolio .Sophisticated money managers in new
York ,London, Frankfurt, Tokyo and other financial centers are well aware of
the advantages of international design securities ,bring their total holdings of such securities to
$6.6 trillion. Foreign official and private investors purchased $$890 billion
worth of us. corporate, federal state, and local securities, raising their
total holding of such securities to $8.6 trillion.
Foreign direct investment (FDI) is
acquisition of foreign asset for the purpose of controlling for them .U.S. government
statisticians define FDI as” ownership or control of 10 percent or more of an
enterprise” voting securities or the equivalent interest in an unincorporated
business”. FDI may take many forms, including purchase of existing assets in a
foreign country, new investment of property, plant, and equipment, and
participation in a joint venture with a local partner. Perhaps the most
historically significant FDI in the United States was the $24 that Dutch
explore Peter Minuet paid local Native Americans Manhattan Island. The result:
New York City, one of the world’s leading financial and commercial centrals.
Figure 6.7
Stock of Foreign Direct Investment,
by Recipient (in billions of dollars)
The
Growth of foreign Direct Investment.
The growth of foreign direct investment during the
past 30 years has been er phenomenal .As figure 6.7 indicates, in 1967the total
stock (or cumulative value) of FDI received by countries worldwide was slightly
over $100 billion. Worldwide FDI as of 2006 topped $12.5 trillion. This
stunning growth in FDI –and its acceleration in the 1990s-reflects the
globalization of the world’s economy. As you might expect, most FDI comes from
developed Countries. Surprisingly, most FDI also goes to deleted countries .We
discuss later in the chapter reason for this explosive growth in FDI.
Foreign
Direct Investment and the United States.
We can gain additional insights into FDI by looking
at individual countries .Consider the stock of FDI in the united states, which
totaled $2.1 trillion (measured at historical cost) at the end of 2007( see
table 6.4[a]).The United Kingdom was the most important source of this FDI
,accounting for $410.80 billion ,or 20 percent of total. The countries listed
by name in table 6.4( a) account for 87percent of total FDI in the United
States.
The stock
of FDI U.S residents in foreign countries totaled $ 2.8 trillion at the end of
2007(see table 6.4[b]).Most of this FDI was in other developed countries,
particularly the united kingdom ($398.8 billion) and the Netherland ($370.2
billion).The countries listed by name in table 6.4 (b) account for 68 percent
of total FDI from the united states.
Looking at
table 6.4, you may wonder why Bermuda, the Bahamas and other small Caribbean
island are so important. The serve as offshore financial centers, which we will
discuss in chapter 8.Many U.S companies set up finance subsidiaries in such
centers to take advantage of low taxes and business-friendly regulations
similarly, many financial services companies from other countries establish
such subsidiaries as the legal owner of their U.S operation.
During the past decade outward FDI has
remained larger than inward FDI for the United States (see figure 6.8), but
both categories have tripled in size. Although inward and outward flows of FDI
are not perfectly matched, the pattern is clear: Most FDI is made by and
destined for the most prosperous countries. In the next section we discuss how
this pattern suggests the crucial role MNCs play in FDI.
a. Sources of FDI in United States
United Kingdom 410.8
Japan 233.1
Canada 213.2
Netherlands 209.4
Germany 202.6
France 168.6
Switzerland 155.7
Luxembourg 134.3
Australia 49.1
Bermuda,The Bahamas, and other Caribbean island 38.7
Other European countries 75.9
Total 2092.9
b. Destination of FDI from the United States
United Kingdom 398.8
Nertherlands 370.2
Canada 257.1
Bermuda,The Bahamas, and other Caribbean islands 243.3
Switzerland 127.7
Luxembourg 113.6
Germany 107.9
Japan 101.6
Mexico 91.7
Ireland 87.0
Other European countries 364.5
All other countries 546.5
Total 2791.9
Source : Suvey of Current Business , July 2008,pp.33,35.
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