The foreign direct investment involves the investors to make investment to acquire the lasting interest in the enterprises that are operational outside the domestic economy. A typical foreign direct investment relationship allows the parent enterprise and a foreign affiliate to form together a transnational corporation.
The portfolio investments are primarily connected with the portfolio diversification process and the examples of portfolio investment are:
- Purchasing of shares in a foreign company
- Purchasing of bonds that is issued by a foreign government
- Acquisition of the assets in a foreign country.
The portfolio investment is a part of the capital account on the balance of payments statistics while the balance of payment or BOP measures the amount of payments that flow from one single country to all other countries. In order to summarize the international economic transactions of a specific country over a specified period of time, usually one financial year, the balance of payment index is counted. Apart from the financial capital investments and financial transfers, the BOP is calculated from the quantity of country's exports and import of goods and services also. In other words, the BOP typically reflects the payments and liabilities to the foreign countries termed as debits and also the obligations and payments received from the foreign countries termed as credits.
The developing countries use the portfolio investment as a growing tool in the economy and take some measures to encourage the use of portfolio investment. While going for liberalization and economic reforms in order to bring about the substantial and rapid economic growth, the government takes up some policies and instruments. The portfolio investment is one of the most famous financial instruments that are taken up by government to enhance the economic growth. The foreign direct investments are also encouraged by the developing countries while going for the economic reforms.