Foreign direct investments are positions where an individual will take an active and controlling interest in the operations or production of a company that is located in a foreign country. Also known by the simple acronym FDI, foreign direct investments are intended to accrue wealth over time by increasing the profitability and efficiency of a companys operations. Let us look at some of the defining factors and benefits that foreign direct investments can provide.

Foreign Direct Investments Defined

Speaking from a broad sense, foreign direct investments are concerned with the following areas of a companys ongoing operations:

• Facility production.
• The reinvestment of overseas profits.
• Loans given from company to company (overseas or domestic).

Thus, we can see that this type of investment has little to do with the stock market and is associated more with physical production and profit. This is in direct contrast with a portfolio investment which takes a notably passive approach in equity investments.

Foreign direct investments generally have less exposure to open market movements.

The Benefits of Foreign Direct Investments

As can be surmised, the main benefits arise from the fact that should a company or investor make a wise choice, a large amount of profit may be generated. While this may be obvious, another subtle advantage is that while such a venture may be seen as a slight risk, these actions will actually increase in frequency during financial downturns. The reason behind this is the fact that while the stock market may fluctuate wildly, foreign direct investments generally have less exposure to open market movements.

The Importance of Developing Countries

Recent trends have witnessed an increasing number of foreign direct investments overseas into areas of the world such as China, India and Africa. There are several reasons for this. A main benefit is the fact that labour markets tend to be cheaper, exchange rates more favourable and a great deal of room for upward growth exists. A second reason is that while Europe and the United States are still reeling from a protracted recession, developing economies are seen to be growing much faster. Therefore, investments in these areas may be more profitable over time.

As the financial world becomes more interconnected, it can only be expected that foreign direct investments will continue to play a prominent role in the global economy. Much like a hegde fund, this type of position is seen as both long-term and conservative.

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