Define International Investment Theory

International investment theory is defined by two general types of foreign investment: foreign portfolio investment and foreign direct investment. These two investment types have specific implications on how a firm decides to invest in a foreign market in the first place.

Owner-Location-Internalization Paradigm

The Owner-Location-Internalization (OLI) paradigm illustrates how a firm maximizes its investment in a foreign market. Under this paradigm, the advantages must benefit the owners, the business must profit from the location, and there must be internal benefits to the business as well.

Opportunity Cost of Investment

Opportunity costs measure the potential losses or gains from other investments. Foreign investors measure the potential gains from other investments to increase the likelihood of a maximum return on investment.

FPI

Using the analytical tools of the OLI paradigm and opportunity costs, investors can choose either foreign portfolio investment (FPI) or foreign direct investment (FDI). FPI is a passive investment strategy for investors to invest in the securities of a foreign country.

FDI

FDI is another component of international investment theory that pursues active investment in a foreign market. Investors are looking for profits and controlling interest in foreign firms.

Financial Gains between FDI and FPI

FDI gains are measured in profits because investors buy controlling interest in foreign businesses, or build plants and other capital investments. In contrast, FPI gains are measured in interest payments, dividends and portfolio growth.

References

• International Investment Theory
• What is International Investment Theory?

Resources

• Broad Overview of Trade Theories