They talk about financial flows all the time: this topic is constantly mentioned in the news, entrepreneurs are talking about them, even for ordinary people they have their own influence. But what is foreign direct investment? How useful is capital inflow, what are the consequences of its outflow?
Investment: the essence
Capital must work and be profitable, otherwise it is a fiction. This economic law has long been known and is one of the basic. Keeping money in banks or under a mattress is extremely inefficient, so you need to invest it. Someone buys gold bullion or diamonds, someone - real estate, and some finance various enterprises in one way or another.
All this, in essence, is an investment, but only the last case is interesting on a global scale. Indeed, it is precisely such investments that are an integral part of the modern economy, pushing it forward and allowing it to develop. Unlike loans, investments are not necessarily returned to the owner on time and with the agreed interest. There is an element of risk - if the company turned out to be profitable, then everyone will be in the black, otherwise there is a possibility of completely or partially losing the investment.
Kinds
Classification can be made according to different criteria. For example, distinguish between domestic and foreign investment. Obviously, in the first case, cash flows are located within the country, and in the second - go beyond them.
But much more often they say about direct and portfolio investment, which in reality are seriously different and affect the economy of the host region in completely different ways. And although often the difference between them is quite arbitrary, a fairly clear classification has been adopted in world practice.
Direct
Investments in this category are funds invested in the real development of an enterprise. They are produced in order to establish control over its activities, decision making. Direct investment is a relatively illiquid asset, so that they provide long-term financial interests.
This market is not so active and dynamic compared to the stock market. Most transactions are made through intermediaries. This is the role of the private equity fund, which has offers for everyone. Often, representatives of such organizations can also act as financial consultants.
Since this type of investment is aimed at the development of production, they are valuable for any economy. They ensure the growth of GDP, the emergence of new technologies and jobs, increasing the efficiency of enterprises, etc. As a result, they develop the economy of the host country, while also bringing profit to the investor himself.
That is why companies and governments are so eager to raise funds. By the way, in recent years, economists have observed a trend towards a decrease in portfolio investment while expanding the direct market. This is probably due to the desire of entrepreneurs to diversify investments and make them more stable and long-term.
Portfolio
As a rule, in this case we are talking about the shares of the company - a relatively liquid asset. Often, an investor’s goal is not to develop an organization and make a profit from its activities, but to profit by speculative methods.Accordingly, such a contributor does not have the ability to manage and influence key decisions made by the company's management.
Of course, in this case, the company does not receive a real financial flow, which could be used for its development. In addition, shares can be sold at any time, so an inflow of capital of this quality does not bring significant benefits to the country - it is momentary. However investing this species is extremely common and more popular than direct. And this is not surprising, because transactions on the exchange are much less risky and, under successful circumstances, can make a profit in the short term.
Raising capital
Direct investments rarely come to the country themselves, so they need to create special conditions that will help people who manage financial flows make the right decision. These may be global measures, within the framework of state policy, or decisions taken by the management of an individual enterprise. Among all the actions aimed at winning the competitive race, the indisputable advantages are:
- transparency of activities;
- ensuring timely and correct reporting;
- raising the educational level of personnel;
- a sufficient level of development of economic institutions;
- the reasonableness of applicable law;
- attractiveness of the tax regime;
- the presence of purchasing power;
- ability to innovate;
- relative political stability;
- provision with basic natural resources.
All these requirements are quite reasonable, because no investor wants to lose their money due to, for example, the overthrow of the current government or inconsistencies in the financial legislation.
Positive changes
Any investment is primarily beneficial, but on the example of direct and come from abroad, this is most noticeable. They contribute to the creation of new and more qualified jobs, thereby increasing the demand for specialists with a good education. Following this, wages are growing in the industry, as well as budget revenues.
The competition is getting tougher, that is, prices are falling and quality is improving, which benefits the end user. Finally, speaking in general, new technologies are being created, the rate of capital accumulation is growing, enterprises are developing, followed by infrastructure, and the country's general welfare is improving without undue burden on budget funds. In a word, this seems like a solid plus.
Negative consequences
Unfortunately, foreign direct investment can affect the economy of the host country and in a bad sense, which is not always remembered.
First of all, with an increase in the share of foreign participation in enterprises, outside influence on them also grows, while the interests of the state may suffer.
Secondly, the private equity market is beginning to crowd out local players, that is, domestic investment flows may weaken, making the entire system vulnerable. In addition, some small enterprises may not withstand competition with large corporations, and companies of all levels are needed in the economy. Nevertheless, if the inflow of capital is correctly and reasonably managed, quite impressive results can be achieved - the world has already seen such examples.
Climate
Despite all the risks arising from the active import of capital, most countries seek to attract direct and portfolio investments, because it is obvious that the benefits outweigh the harm. That is why states compete with each other, improving their financial climate and attractiveness in the eyes of wealthy companies and people who want to invest money. In attempts to maintain capital in the country, steps are being taken to improve the following:
- business conditions, bureaucratic obstacles;
- legislative framework;
- political stability;
- favorable tax regime;
- climatic conditions;
- standard of living.
The set of factors can be very different; some investors are generally guided by subjective feelings. And still, first of all, it depends on the state whether its potential will be perceived and realized.
World experience
Traditionally, the main financial flows are located in Western Europe and the United States. But recent decades have shown that a well-built economic policy aimed at attracting direct investment can easily allow you to "pull the blanket over yourself." We are talking about China, which allows foreign finance to grow the economy at a tremendous pace, mitigate crisis situations and generally serve as a kind of safety cushion. Scientists unanimously say that a perfect leap in the PRC would simply be impossible without redirecting cash flows in its direction on such a scale.
From a practically impoverished country with very scarce mineral reserves and generally rather unfavorable conditions, hardly anyone expected such progress, especially when command economy. But a miracle happened - over several decades, China has developed a serious industrial complex, the service sector, while not abandoning agriculture. Of course, the controversial issue of the standard of living of the population takes place, but to deny the power of the economy, which has become one of the leaders, while recently being in the lagging behind, is simply strange. So a reasonable investment management policy can work wonders, which should be considered by all, without exception.
The situation in Russia
The Russian Federation is a difficult country for investors, many recognize this. Immature legislation, serious problems with the bureaucracy, rampant corruption, the relative instability of the economy, fixation on energy exports, lack of real support from the state, adverse climatic conditions - all this has long been known. For many of these reasons, direct investment in Russia is considered risky, so finance owners avoid this, preferring less profitable and dynamically developing, but "safe" countries.
This is probably why the Russian Federation is mainly an exporter of capital. Despite the endless possibilities of investments within the country, even local entrepreneurs prefer to withdraw their earnings abroad and keep money in foreign currency. It is difficult to influence the situation, but it is possible that the government is making efforts to this end, creating special economic zones and promising tax incentives for investors, but changes for the better are likely to be noticeable soon, if all measures are crowned with success.
