Many business owners want to invest in companies abroad, especially in countries where they have stable economies, better technologies, cheaper raw materials, and lower tax rates; but is investing abroad a good financial move?
Foreign Investment is the investment in domestic companies and assets of another country by a foreign investor. It can be classified into two; Direct and Indirect Investment.
These are the two major types of foreign investment.
Foreign Direct Investments are physical investments and purchases made by a company in another country, by buying machines,factories, buildings and other equipment in the country. These types of investment are more favourable, as they are considered long-term investment and help strengthen the foreign country’s economy.
Foreign Indirect Investments are when companies or financial institutions purchase positions or stakes in companies on a foreign stock exchange. This type of investment is not as favorable as that of direct investment as the home country can easily sell their investments almost as soon as they buy it.
No business is without its risks and foreign investments is not an exception but do the benefits to be gained from it outweigh the risks? Let’s find out.
Drawbacks of Foreign Investment
Negative exchange rates
Foreign investment can sometimes affect the exchange rate of a country, benefitting one country more than the other.
Investing in foreign countries might be more expensive than when goods are exported. At times more money is invested into machinery and intellectual property than in wages for local employees.
Hindrance of domestic investment
Foreign investment sometimes hinders domestic investment as local companies start losing interest to invest in their domestic products.
Even with these, there is a lot to be gained when companies and individuals decide to expand their reach and invest abroad.
Benefits of Foreign Investment
Easy international trade
Countries usually have their own import tariffs which makes trading rather difficult. Foreign investments make trading with other countries a lot easier.
Broader market exposure
Investing in a good number of sectors,across different countries,can help an investor create a diverse fund and reduce risk.
Investing in foreign country with favourable tax rates helps investors make more profits on their investments.
Development of resources
The development of human capital is one of the major gains from foreign investment. The skills gained by the workers through training, increases the overall education and human capital within a country.
Investing in a country that has the necessary tools in place to aid production, will increase the production capacity of your company, thereby increasing your profit margin.
Exchange rate stability
The flow of foreign investment into a country, translates into a continuous flow of foreign exchange which helps a country’s Central Bank maintain a prosperous reserve of foreign exchange which results in stable exchange rates.
With these, it’s clearly evident that foreign investment is not all smooth sailing; after all there is no business that is completely without risks but it’s also evident that the benefits to be gained from it far surpasses the risks.
With all you know about foreign investment, does the reward outweigh the risks for you?
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