THE MEANING OF FOREIGN DIRECT INVESTMENT

THE MEANING
OF FOREIGN DIRECT INVESTMENT

The Concept of Control
In Chapter 1 we saw that for direct investment to take place, control must follow the investment. The amount of ownership share necessary for control is not clear-cut. If stock ownership is widely dispersed, then a small percentage of the holdings may be sufficient to establish control in managerial decision making. On the other hand, even a 100 percent share does not guarantee control. If a government dictates whom a firm hires, what the firm must sell at a specified price, and how earnings will be distributed, then one could say that control has passed to the government. These are all decisions that governments frequently do impose on foreign or domestic investors operating within their confines. But it is not only governments that may jeopardize the stockholders' control. If some resource needed for the firm to operate is not regulated by the firm's owners, then those who control the resource may exert substantial influence on the firm. Because of the difficulty of identifying direct investments, governmental offices have had to establish arbitrary definitions, usually indicating ownership of either 10 or 25 percent of the voting stock in a foreign enterprise as minimum for an investment to be considered direct.

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