Movements of money across national borders can take one of the following forms:
Private payments for the purchase of foreign goods and services
Government payments for the purchase of foreign goods and services
Government payments for aid, pensions, etc. (transfer payments)
Private payments for the purpose of investing in the private or government sector to derive earnings (interest, dividends, etc.)
This section is concerned with the last category of money exchanges—the movement of money across national boundaries for the exclusive purpose of earning money (that is, investment).
What holds true for exchanges of goods and services holds true for money also. A country may export money that is in excess of domestic demand, or, conversely, a country may import money (subject to laws and regulations) when the demand for it cannot be domestically satisfied.
Money available for international investment will go where the yield from its use (that is, interest payments or dividends) is the highest. In general, foreign investment will assume one or a combination of the following forms:
Portfolio investment (corporate stocks and bonds)
Direct foreign investment (facilities and other goods-producing assets)
Investment in government securities (for example, U.S. Treasury bonds)
Money invested in any of these three forms in foreign countries constitutes an outflow ( – ) of money from the investing country (called the home country) and therefore signifies an increase in a country's fixed assets abroad. In other words, a country converts current (short-term, liquid) assets into fixed (long-term, nonliquid) assets.
For the country in which the money is invested (called the recipient, or host, country), the investment constitutes an inflow ( + ) of money and therefore signifies an increase in that country's long-term liabilities to foreigners. In other words, a country converts current (short-term, liquid) liabilities into long-term debt. The short-term liabilities stem from the country's demand for foreign goods and services that can now be produced locally because of another country's willingness to invest.
Whether the foreign money is invested in the private sector, in governmental stocks and bonds, or in brick and mortar facilities, the investment represents an exchange of short-term (liquid) assets of the home country for long-term (fixed) obligations of the host country. The investing country deprives its institutions of investment opportunities while boosting the host country's domestic money pool.
In the nomenclature of the U.S. Department of Commerce, U.S. money invested abroad in plant and equipment is called direct foreign investment (USDFI). Conversely, money invested in this country by foreigners is called direct foreign investment in the United States (DFIUS). Historically, foreign investment followed trade, which, of course, followed political hegemony and knowledge of business practices. Thus, Europe—primarily the United Kingdom, France, Spain, and Portugal, which had historically colonized most of the North and South American, Asian, and African continents—was the most important investor in foreign lands. Europe's investment was concentrated on primary products, especially raw materials and minerals needed to fuel its industrial revolution and economic development.
The end of World War II ushered in a new era of foreign investment. This new era was characterized by an increase in the variety of the investing countries as well as in the types of foreign investment. Among the new actors, the United States emerged in a very short period of time as the most important investor, largely because of the demand for reconstruction of the almost demolished European nations.
This hegemony of the United States in the international investment sphere was not the only novelty in post-World War II history. More significant than the skyrocketing of the volume of foreign investment was the change in the nature of investment away from investment whose purpose was to secure the uninterrupted flow of raw materials to the investing country (that is, for production purposes) and toward investment in the production of industrial and consumer goods (that is, for consumption purposes).
The reasons for and the rationale behind foreign investment are explored in THE MULTINATIONAL CORPORATION. It will suffice to say here that foreign investment represents one of the most complex and least understood subjects of international business, in part because the complete impact of foreign investment decisions on the investing and recipient countries is not easy to assess.
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