Technology has opened the world for companies and individual investors. Businesses tap markets in other countries by opening subsidiary operations, purchasing a company based outside of the U.S. or entering joint ventures. U.S. investors diversify their portfolios with stocks, currencies and bonds rooted in foreign economies. Foreign and international investments share a global perspective and similar risks; however, the terms apply to different audiences and activities.
Foreign investment, also called foreign direct investment, occurs when a company establishes a physical presence in another country, usually in the form of manufacturing or sales operations. When it involves establishing a new facility from scratch to make the same product as the firm makes domestically, the investment is horizontal. For example, a Japanese automaker's assembly plants in the U.S. represent foreign investment that is also a "greenfield" foreign investment, because the facilities were all new. A company that opens a facility outside the U.S. to produce components for its main business demonstrates vertical foreign investment. A U.S. computer firm building a chip-manufacturing plant in Asia represents a vertical foreign investment. U.S.-based hotels that open resorts and fast-food chains launching new restaurants abroad are other foreign investments.
While some people follow a "buy American" philosophy when deciding how to invest their savings, others see potential for higher returns and diversity from a global approach to choosing investment options. Buying stock in foreign companies and purchasing bonds issued by foreign entities represent international investment. International investment portfolios can contain mutual funds that specialize in a geographic region such as Asia, a country such as Brazil or an international index fund. An investor's international investment may also entail purchasing American Depositary Receipts, or ADRs, which are shares in foreign firms that trade in the U.S. A less direct form of international investments involves purchasing stocks of foreign firms trading on U.S. stock exchanges.
Both foreign and international investment carry risks. A country's political, social and economic situations can change without warning, affecting interest rates and currency value, and this can make a move into foreign markets less attractive financially. Companies with foreign operations also cope with security concerns for their facilities and personnel. Fluctuating exchange rates can lower returns on stock purchases. Company information may not be as prevalent in some countries as it is in the U.S., and the legal environment may not give investors any recourse should problems arise. Foreign tax laws that can be complex apply to both types of investment.
While multinational companies can purchase insurance against the political risks their foreign operations face, individual investors have no such option. The Securities Investor Protection Act, or SIPA, only covers foreign stocks held through a U.S. SIPA member. Businesses also enjoy benefits from bilateral investment treaties and other trade agreements the U.S. has negotiated with other countries.
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- Nasdaq: American Depositary Receipt (ADR)
- Risk Management: The Political Risks of Doing Business Overseas
- Office of the United States Trade Representative: Bilateral Investment Treaties
- Securities Investor Protection Corporation: What SIPC Covers ... What It Does Not
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