FOREIGN DIRECT AND PORTFOLIO INVESTMENT, DIFFERENCES & SIMILARITIES
I. Foreign Direct Investment (FDI)
According to Jones and Wren in Foreign Direct Investment and the Regional Economy (2012):
The standard definition of foreign direct investment is given by the Organization for Economic Cooperation and Development (OECD, 1996). A key aspect of this is that it represents the notion of one enterprise in a particular country having a degree of control over another enterprise in a different country, as opposed to just the provision of financial capital. It is classed as, “investment that adds to, deducts from or acquires a lasting interest in an enterprise operating in an economy” arising from outside the country in order to “have an effective voice in the management of the enterprise” (OECD, 1996, p. 7). In the event that a foreign investor does not have an effective voice in the management of the company, then the investment is classified as „portfolio investment‟ (emphasis added).
II. Portfolio investment
In his book „The International Law on Foreign Investment’ (2004), M. Somarajah explains the differences between the FDI and the portfolio investment more clearly:
The distinguishing element is that, in portfolio investment, there is a divorce between management and control of the company and the share of ownership in it.
In other words, the main difference between the FDI and portfolio investment is that in the first one, the share of ownership in a company resulting from an investment in the company accompanies effective management and control in it while in the latter, these two elements do not move hand in hand.
To understand the subject of this report, therefore, we need to learn more about legal control of companies.
III. Corporate control
The following elements may result in having control of a corporation:
a. The right to a majority of the votes in the election of the Board of Directors;
b. Control by management, if management is not under complete control of the Board of Directors