In a global economy today, FDI is becoming more important than trade as a mode of international economic transactions. There are two categories of investment: direct investment and: portfolio investment.
Direct investment implies that investment is followed by control – it implies an ownership share of at least 10 or 25 percent; otherwise, it is considered as portfolio investment. Portfolio investment (i.e., investment devoid of control) has its own importance in a firm’s financial management and strategy. It is also an influencing factor affecting exchange rate.
IMF defined FDI as “investment that is made to acquire a lasting interest in an enterprise operating in an economy other than that of the investor. The investor’s purpose being to have an effective voice in the management of the enterprise.” (IMF 1977).
FDI refers to an investment in a foreign country that involves some degree of control and participation in management. The FDI corresponds with the investment undertaken by a multinational enterprise in a foreign country. It should not be misconstrued with portfolio investment, which is solely motivated by profit through financial investment and does not seek management control.