The Russian economy is currently experiencing a challenging period. Domestic investors are reluctant to entrust their funds to companies, while banking institutions are significantly reducing lending. As a result, the situation in the domestic market is deteriorating, leading to an acute financing shortage for companies.
In this context, attracting foreign direct investment (FDI) emerges as a viable solution. In this scenario, funds are allocated to companies by physical or legal entities.
The funds can be directed towards the fixed assets of the enterprise, or the investor may acquire 10% or more of the company's shares. Additionally, instead of cash, the investor may provide equipment, technology, etc., which can enhance the organization's profitability.
Foreign direct investments are attracted by both domestic and foreign companies that have branches within Russia.
This type of cooperation has numerous features as well as advantages.
To help navigate this type of investment, Sergey Tereshkin, the founder of Resource, offers his insights. The entrepreneur not only invests his own funds but also attracts external capital. As a result, he has gained significant experience and has become familiar with the challenges of this investment tool. For more detailed information about his activities, it is recommended to visit his website: www.org-market.ru.
Types of Investments
Direct investments imply the transfer of a certain stake in the company to the investor, along with control over its operations.
Unlike portfolio investment, direct investment is relatively inert. This means that the market does not react swiftly to any changes. Consequently, even in the event of a company's financial downturn, investors cannot quickly reclaim their funds.
This provides the enterprise with time to rectify the situation. Additionally, direct investments are characterized by good liquidity.
There are several types of direct investments:
- Transcontinental. The company and its shareholders can sell their products not only domestically but also internationally. Management chooses its market presence strategy independent of incurred costs, focusing solely on funds directed at increasing production capacity in a given country.
- Transnational. Investments are directed towards companies located in neighboring countries. This strategy allows for a significant reduction in production costs and achieves a higher return than the parent company. Typically, a country with a low economic level and labor costs is chosen.
Both options are characterized by efficiency and liquidity. The choice depends on the entrepreneur's goals.
Characteristics
Direct investments have several characteristics:
- Risks. Direct investments come with a higher level of risk, especially compared to portfolio investments.
- Volume. Enterprises require significant capital input. In this case, a mere thousand dollars will not suffice; businesses often need tens or even hundreds of thousands.
- Fund withdrawal. With such investments, leaving the market quickly is not feasible.
There are countries that welcome foreign capital. However, in some nations, such investments are not possible due to legislative restrictions or sanctions.
Investment Methods
Direct investments can be directed towards the nation's industry in various ways:
- Acquisition or takeover. A large corporation purchases a smaller one or merges with it.
- Establishing a new company. Investors can create a new enterprise into which investments will subsequently be made.
Skillful actions by the government can significantly attract funds from foreign investors. This improves the economic situation and creates a favorable microclimate for attracting and growing capital.
Hidden Challenges
It’s important to be aware of the hidden challenges that investors face when making direct investments in another country's economy. Shareholders encounter these challenges to varying degrees. When forming a portfolio, an entrepreneur earns rights to profits arising in the following reporting period.
Capital is invested in the securities of companies registered and operating within another country. In this case, the investor cannot form a portfolio of shares, nor does he become a purchaser of eurobonds or join a financial organization.
In portfolio investing, funds may not be directed towards increasing production capacity. The investor cannot fully control the operations of the enterprise. In this case, stocks, shares, bonds, and other securities are purchased, with the package not exceeding 10% of the company's charter capital.
According to Sergey Tereshkin's observations, portfolio investments are most frequently attractive to corporations engaging in international market operations to solve various financial challenges. Such investments are often not long-term, and shareholders do not gain management control over the enterprise.
Portfolio investment can be carried out in various ways. For example, an entrepreneur can purchase securities in their home country, buy shares on the market of another country, or invest in mutual funds abroad.
It is crucial to understand that both foreign direct investments and portfolio investments have a rather blurry boundary, making it easy for potential investors to confuse these concepts. As a result, problems can emerge during the investment process, potentially leading to losses or funds being frozen for extended periods.
Direct investments represent a genuine opportunity for revitalizing a country's economy and enhancing company profitability. In this case, it is essential to have significant amounts that can be directed towards business development.
