International Investing (2024)

FAQs

What is an international investment? ›

What is international investing? International investing is an investment strategy that involves selecting global investment instruments as part of an investment portfolio. People often invest internationally to expand diversification and distribute investment risk between markets and global companies.

Key Takeaways

Home-country bias leads investors to favor domestic securities despite potential global opportunities. U.S. stocks accounted for 44.9% of the global equity market capitalization in 2023. International stocks offer diversification, exposure to global growth and industry representation.

The decision to invest overseas should begin with determining the riskiness of the investment climate in the country under consideration. Country risk refers to the economic, political, and business risks that are unique to a specific country, and that might result in unexpected investment losses.

foreign direct investment (FDI) – where an investor sets up or buys a company (or a controlling share in a company) in another country, and; portfolio investment – where an investor buys shares in, or debt of, a foreign company without controlling that company.

Depending on the nature and investment objective of the scheme, an international equity fund manager may either directly invest in foreign securities or, in a foreign fund that invests in foreign securities. International funds allow retail investors to benefit from the growth and success of companies across the world.

International bonds are a great way to diversify a portfolio as the investor can gain exposure to foreign securities that may not necessarily move in tandem with securities trading on local markets.

In general, Vanguard recommends that at least 20% of your overall portfolio should be invested in international stocks and bonds. However, to get the full diversification benefits, consider investing about 40% of your stock allocation in international stocks and about 30% of your bond allocation in international bonds.

Disadvantages of international finance

Political turmoil in one country which is a stakeholder of international trade can affect the other stakeholder of the same trade-in another country. Depending on other country's exchange rate is always risky given that all the currencies have significant volatility.

What is one disadvantage of overseas investment? ›

Disadvantages of Foreign Direct Investment

One of the main concerns is the potential for exploitation and loss of control by the host country. When a foreign company invests in a local business, it may have significant control over the operations and decision-making processes.

Some potential disadvantages of foreign direct investment (FDI): The host country can lose control over its economy, and people may lose jobs if companies relocate production to lower-cost countries. There can be negative impacts on the environment from foreign investment in extractive industries.

An application can be made on the Foreign Investment Facilitation Portal (FIFP), which is a new online portal to facilitate FDI approvals for investors. This portal is administered by the Department of Industrial Policy and Promotion and the Ministry of Commerce and Industry.

For example, you can invest in commodities in Australia, engineering space in Europe, or technology in the US market. You can also invest in various countries through ETFs. The global investment brings you the opportunity to invest in industry giants globally.

Freedom—political, legal, and economic—is a crucial factor in attracting FDI and fostering economic growth. As we've seen, regions with higher levels of freedom tend to receive more FDI, driven by strong legal frameworks, well-defined property rights, and transparent governance structures.

An example would be McDonald's investing in an Asian country to increase the number of stores in the region. Here, a business enters a foreign economy to strengthen a part of its supply chain without changing its business in any way.

International finance is the study of monetary interactions that transpire between two or more countries. International finance focuses on areas such as foreign direct investment and currency exchange rates. Increased globalization has magnified the importance of international finance.

As mentioned above, an investor can make a foreign direct investment by expanding their business in a foreign country. Amazon opening a new headquarters in Vancouver, Canada would be an example of this.