The Foreign and International Investment Theory

Issuing capital in the form of an investment isn't limited to businesses and individuals. Banks and governments engage in this type of lending activity with each other as well. Though the reasons for issuing investment differ depending on the situation and lender, both parties stand to benefit. However, international investment can be just as risky for the lender and recipient as well.

History

• Countries have been borrowing money and seeking foreign investment for centuries, notably during wars when countries needed financing for weaponry and infantry. Mira Wilkins explains in her book "The History of Foreign Investment in the United States" that in the early 1900s, European countries including Britain, the Netherlands, Belgium, Canada and Italy heavily invested in the United States for economic reasons. Such investment fueled U.S. growth in manufacturing, banking and agriculture.

  The United States also gave loans to impoverished European nations post-WWI and WWII to stabilize their economies. Today, most countries offer foreign investment as a way to safeguard their own economic reserves.

Benefits to Issuers

• The theory of foreign and international investment holds that investing in a country with a stable economy is one way of generating a steady return on your investment. For instance, the United States attracts foreign investment from Japan and China by auctioning off its Treasury Bills. The Congressional budget outlines how much the United States is expected to pay to other nations in interest on this debt.

Benefits to Recipients

• Tseng and Markus Rodlauer state in their book "China, Competing in the Global Economy" that foreign direct investment increases the rate of a country's Gross Domestic Product by enhancing the volume of capital. Examples of capital expenditures that assist with a nation's economic growth include military purchases, imports from overseas and development of infrastructure.

Additional Considerations

• Foreign investment is also issued to economically troubled countries as a bailout. The United States is the primary backer of loans distributed by the International Monetary Fund, or IMF. The IMF issues loans to countries needing an infusion of cash as a means of stabilizing their economies, particularly if a debt crisis occurs. Examples of countries that have received IMF loans include the Ukraine, Hungary, Argentina, India, Mexico, Pakistan, Turkey and the Philippines. In some cases, multinational corporations provide foreign investment in the form of a private loan. Private firms typically require the country to use its natural resources as collateral should the country default.

Warning

• Foreign direct investment does not always improve the economic conditions of a country. John Perkins warns in his book "Confessions of an Economic Hitman" of the ways companies exploit a country's defaulted loans and subsequent debt by usurping its valuable resources. In these instances, the citizens of the nation are worse off. Though China's investment in the United States is beneficial in the short-run, the United States' growing debt and trade deficit could cause economic problems in the long-run. Thus, foreign direct investment is akin to having access to a credit card: While access to credit is valuable in certain situations, relying on it and carrying a high balance poses long-term issues.