Question 8
What is the difference between a direct foreign investment and a portfolio foreign investment?
Give an example of each. Which type of investment is a multinational industrial company more
likely to make?
The direct foreign investment indicated that the financial account keeps track of a country’s
payments for new DFI over a given period (such as a specific quarter or year). Payments
representing DFI in the United States (such as the acquisition of a U.S. firm by a non-U.S. firm)
are recorded as a positive number in the U.S. financial account, because funds are flowing into
the United States. Examples of DFI by the United States include an MNC’s payments to
complete its acquisition of a foreign company, to construct a new manufacturing plant in a
foreign country, or to expand an existing plant in a foreign country. On the other hand, the
portfolio foreign investment indicated that the financial account also keeps track of a country’s
payments for new portfolio investment (investment in financial assets such as stocks or bonds)
over a given period (such as a specific quarter or year). Thus, a purchase of Heineken
International (Netherlands) stock by a U.S. investor is classified as portfolio investment
because it represents a purchase of foreign financial assets without changing control of the
company. This transaction is recorded as a negative number for the U.S. financial account (a
debit), as it reflects a payment from the United States to another country.
The direct foreign investment is more likely to make. This is because it tends to involve
establishing more of a substantial, long-term interest in the economy of a foreign country.
Also, due to the significantly higher level of investment required, foreign direct investment is
usually undertaken by multinational companies, large institutions, or venture capital firms.
Foreign direct investment tends to be viewed more favorably since they are considered longterm investments, as well as investments in the well-being of the country itself. At the same
time, the nature of direct investment, such as creating or acquiring a manufacturing facility,
makes it much more difficult to liquidate or pull out of the investment. For this reason, direct
investment is usually undertaken with essentially the same attitude as establishing a business
in one's own country—with the intention of making the business profitable and continuing its
operation indefinitely.
Question 9
What are the immediate and long-term impacts on the U.S. balance of payments when foreign
portfolio investors acquire a substantial portion of U.S. Treasury bond issues for investment
purposes?
U.S. able to gain control for the balance of payments of its country, and the balance of payments’
value become larger. A balance of payments surplus will happen, indicated that the U.S.
exports more than it imports. It provides enough capital to pay for all domestic production. The
country might even lend outside its borders. The immediate impact is a surplus may
boost economic growth in the short term. There are enough excess savings to lend to countries
that buy its products. The increased exports boost production in its factories, allowing them
to hire more people. In the long run, the country becomes too dependent on export-driven
growth. It must encourage its residents to spend more.