What is International Business/ International Trade ?

International Trade is usually referred to the exchange of goods, and services

across international borders or territories. International trade creates a mutually
beneficial set up between countries and companies that operate within them, as the
market for goods and services produced in a country expands globally.

What is a 'Foreign Direct Investment - FDI'

Foreign direct investment (FDI) is an investment made by a company or individual

in one country for business interests in another country, in the form of either
establishing business operations or acquiring business assets in the other country,
such as ownership or controlling interest in a foreign company.

FDI refers more specifically to the investment of foreign assets into domestic
goods and services. FDIs are generally favored over equity investments which tend
to flow out of an economy at the first sign of trouble which leaves countries more
susceptible to shocks in their money markets.

What is 'Foreign Portfolio Investment - FPI'

Foreign portfolio investment (FPI) consists of securities and other financial assets
passively held by foreign investors. It does not provide the investor with direct
ownership of financial assets and is relatively liquid depending on the volatility of
the market

FDI versus FPI

 FDI FPI

Management Projects are efficiently Projects are less efficiently managed

managed

Involvement - Involved in management No active involvement in management.

direct or and ownership control; long- Investment instruments that are more
indirect term interest easily traded, less permanent and do not
represent a controlling stake in an
enterprise.

Sell off It is more difficult to sell off It is fairly easy to sell securities and
or pull out. pull out because they are liquid.

Comes from Tends to be undertaken by Comes from more diverse sources e.g.a
Multinational organisations small company's pension fund or
through mutual funds held by
individuals; investment via equity
instruments (stocks) or debt (bonds) of
a foreign enterprise.

What is Involves the transfer of non- Only investment of financial assets.

invested financial assets
e.g.technology and
intellectual capital, in
addition to financial assets.

Stands for Foreign Direct Investment Foreign Portfolio Investment

Volatility Having smaller in net Having larger net inflows

inflows
foreign market entry strategies

direct way

Direct Export
The organisation produces their product in their home market and then sells them
to customers overseas.

.
Partnering
Partnering is almost a necessity when entering foreign markets and in some parts
of the world (e.g. Asia) it may be required. Partnering can take a variety of forms
from a simple co-marketing arrangement to a sophisticated strategic alliance for
manufacturing. Partnering is a particularly useful strategy in those markets where
the culture, both business and social, is substantively different than your own as
local partners bring local market knowledge, contacts and if chosen wisely
customers.
Buying a Company
In some markets buying an existing local company may be the most appropriate
entry strategy. This may be because the company has substantial market share, are
a direct competitor to you or due to government regulations this is the only option
for your firm to enter the market. It is certainly the most costly and determining the
true value of a firm in a foreign market will require substantial due diligence. On
the plus side this entry strategy will immediately provide you the status of being a
local company and you will receive the benefits of local market knowledge, an
established customer base and be treated by the local government as a local firm.
Piggybacking
Piggybacking is a particularly unique way of entering the international arena. If
you have a particularly interesting and unique product or service that you sell to
large domestic firms that are currently involved in foreign markets you may want
to approach them to see if your product or service can be included in their
inventory for international markets. This reduces your risk and costs because you
are essentially selling domestically and the larger firm is marketing your product or
service for you internationally.
Licensing
Another less risky market entry method is licensing. Here the Licensor will grant
an organisation in the foreign market a license to produce the product, use the
brand name etc. in return that they will receive a royalty payment.

Franchising
Franchising is another form of licensing. Here the organisation puts together a
package of the successful ingredients that made them a success in their home
market and then franchise this package to overseas investors. The Franchise holder
may help out by providing training and marketing the services or product.
McDonalds is a popular example of a Franchising option for expanding in
international markets.

Contracting
Another of form on market entry in an overseas market which involves the
exchange of ideas is contracting. The manufacturer of the product will contract out
the production of the product to another organisation to produce the product on
their behalf. Clearly contracting out saves the organisation exporting to the foreign
market.

Manufacturing Abroad
The ultimate decision to sell abroad is the decision to establish a manufacturing
plant in the host country. The government of the host country may give the
organisation some form of tax advantage because they wish to attract inward
investment to help create employment for their economy.

Joint Venture
To share the risk of market entry into a foreign market, two organisations may
come together to form a company to operate in the host country. The two
companies may share knowledge and expertise to assist them in the development
of company, of course profits will have to be shared between the two firms.
Indirect way

Indirect exports

Indirect export is the process of exporting through domestically based export

intermediaries. The exporter has no control over its products in the foreign market.

Export trading companies (ETCs)

These provide support services of the entire export process for one or more
suppliers. Attractive to suppliers that are not familiar with exporting as ETCs
usually perform all the necessary work: locate overseas trading partners,
present the product, quote on specific enquiries, etc.
Export management companies (EMCs)
These are similar to ETCs in the way that they usually export for producers.
Unlike ETCs, they rarely take on export credit risks and carry one type of
product, not representing competing ones. Usually, EMCs trade on behalf of
their suppliers as their export departments
Export merchants
Export merchants are wholesale companies that buy unpackaged products
from suppliers/manufacturers for resale overseas under their own brand
names. The advantage of export merchants is promotion. One of the
disadvantages for using export merchants result in presence of identical
products under different brand names and pricing on the market, meaning
that export merchants activities may hinder manufacturers exporting
efforts.
Confirming houses
These are intermediate sellers that work for foreign buyers. They receive the
product requirements from their clients, negotiate purchases, make delivery,
and pay the suppliers/manufacturers. An opportunity here arises in the fact
that if the client likes the product it may become a trade representative. A
potential disadvantage includes suppliers unawareness and lack of control
over what a confirming house does with their product.
Nonconforming purchasing agents
 These are similar to confirming houses with the exception that they do not
pay the suppliers directly payments take place between a
supplier/manufacturer and a foreign buyer.

why managerial control absent in foreign portfolio investment

A portfolio investment is a grouping of assets such as stocks, bonds, and cash equivalents. Portfolio
investments are held directly by an investor or managed by financial professionals.
In economics, foreign portfolio investment is the entry offunds into a country
where foreigners deposit money in a country's bank or make purchases in the
countrys stock and bond markets, sometimes for speculation.

Portfolio investments typically involve transactions in securities that are highly liquid, i.e. they can be
bought and sold very quickly. A portfolio investment is an investment made by an investor who is not
involved in the management of a company. This is in contrast to direct investment, which allows an
investor to exercise a certain degree of managerial control over a company. Equity investments
where the owner holds less than 10% of a company's shares are classified as portfolio investment.
[3]
These transactions are also referred to as "portfolio flows" and are recorded in the financial
account of a country's balance of payments. According to the Institute of International Finance,
portfolio flows arise through the transfer of ownership of securities from one country to another.[4]

Foreign portfolio investment is positively influenced by high rates of return and reduction of risk
through geographic diversification. The return on foreign portfolio investment is normally in the form
of interest payments or non-voting dividends.