The investment entry mode is the one that requires the most commitment on the part of a company, in terms of both management time and financial and human resources. A company that decides to enter the international market by investing equity in a foreign country is giving its stockholders a clear message that international business will be a substantial factor in its future survival and growth. In addition, management is communicating to its stockholders that experience accumulated through previous involvement in exporting and international contractual agreements will now be put to use in pursuit of higher stakes.
There are two major types of foreign investment: portfolio foreign investment (PFI) and direct foreign investment (DFI). Both of these types of investment represent equity participation on the part of the international company. The difference between them is that with PFI the management of the investing company has no substantial involvement beyond that of the ordinary stockholder, whereas with DFI the investing company organizes and operates the enterprise.
Portfolio foreign investment will not be dealt with here; it is a straightforward financial transaction performed by top management with the assistance of staff and external consultants. This mode of entry into foreign markets has lately taken on a new twist with the creation of financial instruments known as junk bonds. A small group of top executives use the company's name and other tangible and intangible resources to create these extremely high risk bonds, worth much more than the company's market value. These junk bonds are then used to buy out the company in what is known as a leveraged buyout (LBO).
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