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Foreign investment


The acquisition by governments, institutions or individuals in one country of assets in another. Foreign investment is defined to cover both direct investments and portfolio investment and includes both public authorities and private firms and individuals. For a country in which savings are insufficient relative to the potential demand for investment, foreign capita! can be a fruitful means of stimulating rapid growth. In addition, direct investment may be a means of easing the strain on the balance of payments which might otherwise occur in response to an increase of home demand. Direct investment aften involves the setting up of subsidiary companies for the domestic production of goods which previously were imported from the parent company. There have been in recent years same major shifts in the U.K. balance of foreign investment overseas. In 1974 the investment account of the balance of payments was in surplus by an unprecedented £1 billion, largely due to the increase in net investment by the oil companies in the development of the U.K. off-shore oil industry. However, in each year of the four years to 1981 the net flow of foreign investment was reversed, so that by 1981 there was a deficit of about £8 billion. In 1979 exchange controls were removed and this stimulated a sub­stantial increase in U.K. portfolio investment overseas. In addition there was an equal expansion by the U.K. of net direct foreign investment in that year.

Reference: The Penguin Dictionary of Economics, 3rd edt.