Investment activity

A. TEXT

Investments

In economic science, investment is capital expenditure on physical productive assets, e.g. machinery, factory buildings, roads, bridges houses, and stocks. Real investments generally involve some kind of tangible asset.

As a financial term investment embraces purchases of stock exchange securities or deposits of money in banks, building societies, or other financial institutions, with a view to income and, in appropriate cases, capital gains.

Users of capital, from governments to every kind of industrial or commercial joint-stock company, all depend for the supply of their financial resources on those who are willing to invest their funds, on investors.

Investment is closely associated with other aspects of economic order such as the role of financial centres, labour migration, and the regime of international trade prevailing at the time.

Technological advances, the removal of exchange controls and financial deregulation have all contributed to the expansion of international capital flows. As a result foreign investment has become a fundamental feature of international economic development.

There are two main channels for international investment: foreign direct investment (FDI) and foreign indirect investment, or portfolio investment.

Foreign direct investment (FDI) occurs when citizens of one nation (the "home" nation) acquire managerial control of economic activities in some other nation (the "host" nation). Setting up a foreign operation through a joint venture, establishment of a foreign branch or the purchase or formation of a foreign subsidiary are examples of foreign direct investment.

Firms controlling activities in several nations have become known as "multinational enterprises" (MNSs), "transnational corporations” (TNCs) and, more recently, "global corporations".

The reasons why effects of FDI are generally assessed as positive can be summarized as follows: first, FDI speeds the international diffusion of new technologies and other efficiency enhancing intangible assets, such as organizational skills. Then, FDI in many national markets will stimulate competition among firms.

The process of supplying capital to a foreign institution, through a loan or purchase of stock, without sharing in the institutions management is foreign indirect investment.

In financial circles, individuals or households that own securities are known as individual investors. Along with them, there are institutional investors.

Institutional investors are a group of investors who have funds to invest as a consequence of the conduct of their business. The group includes insurance companies, banks, investment trusts, financial and industrial companies.

The past 30 years have witnessed a concentration of financial power in the hands of institutional investors. In 1990 they controlled over $6 trillion in assets, the majority invested in common stock and corporate and government bonds.

An investor, when confronted with a list of investment possibilities, will want to assess the risks and general advantages and disadvantages connected with putting his or her money into this or that security. To receive higher return, investors must be prepared to accept a higher level of risk. Trying to limit or minimize the risk investors construct and diversify portfolios and spread their foreign investments among a number of different countries.

Institutional investors have contributed to development of new types of investment management techniques, sophisticated portfolio monitoring, have pioneered the application of quantitative security valuation techniques, such as dividend discount models.

In spite of the existing obstacles, recent years have seen a growing interest of foreign investors in the Russian market.

B. DIALOGUE