What Is International Investment Theory?

by Gilberto Fuentes ; Updated July 27, 2017

International investment theory explains the flow of investment capital into and out of a country by investors who want to maximize the return on their investments. One of the major factors that influences international investment is the potential return on alternative investments in the home country or other foreign markets.

Opportunity Cost

International investment theory is largely determined by the opportunity cost of investment. International investors compare various investment alternatives and select the opportunity that is likely to maximize returns.

Foreign Portfolio Investment

Foreign portfolio investment (FPI) is passive foreign investment where investors do not directly participate in the investment in the foreign country. Instead, investors put their money into foreign securities and other investments to earn interest or dividends.

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Foreign Direct Investment

Foreign direct investment (FDI) is the other part of international investment theory, and is an active investment in a foreign country. Instead of investing in securities, investors directly build factories or gain controlling interest in foreign businesses to earn profits.

Theories of FDI

In general, it is helpful to look at FDI theories as an attempt to answer the "who, what, when, where, why, and how" of a particular investment, and to determine whether the economic factors involved justify making foreign investment.

OLI Paradigm

To answer the questions of FDI, international investment theory draws on the OLI (Owner, Location, Internalization) paradigm. The OLI paradigm analyzes international investment from the perspective of ownership, location, and the firm’s internalization. Internalization refers to the firm's ability to gain first-mover advantage in a new market, and therefore have a competitive edge.

About the Author

Gilberto Fuentes draws on his experience in financial services to develop copy for websites in the United States, United Kingdom and Latin America. His work has been published in the online editions of the "San Francisco Chronicle" and the "Houston Chronicle." Fuentes lives in New York and holds a dual Bachelor of Arts in English and economics.

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