Research These 5 Areas Before Making a Foreign Direct Investment

What to Look For and What to Avoid When Investing Overseas

There are many ways to invest in overseas markets, from stocks and mutual funds to foreign direct investments. Foreign direct investments (FDIs) are investments made by a firm or individual in one country into a company or company’s assets in another country. These investments can come in several forms, including voting stock in a foreign company or a merger acquisition. Investing in the right overseas market or foreign company can produce significant returns — and help in the economic and political relations with these countries and their development.

Where do investors put their money, and how do they decide where to invest? The US has topped the list for the most foreign direct investments for the twelfth consecutive year, according to the 2024 Foreign Direct Investment (FDI) Confidence Index by AT Kearney. While it’s a success for the US, the survey shows that investors still stick to highly developed countries. It also shows a higher percentage of investor caution due to the pandemic and other political and economic issues.

Overseas markets are loaded with opportunity, but for many investors, risk, and fear of the unknown still outweigh the intrigue of global investing. Many may stick to a few tried and true markets. However, with the right knowledge and timing, reaching outside the norm of international investing can bring back big returns.

Factors to Consider Before Making Overseas Investments

There are many things to consider when looking at foreign equities or foreign firms, including:

• Politics
• Area of investment
• Culture
• Rules and regulations
• Infrastructure and workforce

Knowing how to compare and contrast these elements is crucial in deciphering which overseas markets are worth exploring and which ones to avoid.

Politics

First, the country’s politics should be considered before investing in that country’s stock market or making an FDI. If a country has a relatively new form of government — or experiences quick growth, but the institutional changes haven’t caught up — then that is an area to avoid.

Another element to consider is the political risk. Think BREXIT or a civil war. Changes in public policy, corruption, and revisions in codes and regulations are all things that should be researched as well as avoided.

While it is impossible to prepare for all political and economic risks, the more you know about them, the more you can predict how they may impact the area of investment.

Area of Investment

The area of investment (e.g., consumer goods or natural resources) should be highly researched before investing. First, understand how events in that country impact different industries. As with many utilities, oil, gas, and mining have the highest risk of being affected by political events. Tourism is another industry affected by political events and, most glaringly, viral pandemics. Foreign companies less affected by outside forces such as politics or the environment are a much better idea. It is also essential to examine the repatriation rules and whether or not you can get your money out.

Due to discounted share prices and Biden’s trade-friendly policies, foreign equities in various industries show potential. Experts Jeremy Schwartz of WisdomTree Asset Management and Bryon Lake at J.P. Morgan Asset Management told CNBC’s “ETF Edge” in 2021 that emerging markets may outperform US stocks. They positively cite technology (particularly in China), clean energy, luxury goods, and other investment areas as potentially rewarding.  As of 2024, their prediction holds weight according to Fidelity’s Asset Allocation Research Team, which expects non-US stocks to outperform US stocks in the years ahead. However, you do not have to put all your eggs in individual baskets, as foreign ETFs can help you diversify across various industries and stocks.

Culture

Knowing the country’s culture is as important as learning about its politics and economy — it can save you a lot of trouble and money. For example, some cultures accept lying to save face, and some have negative attitudes toward foreigners and foreign investors. It could be worth hiring a team with local expertise before investing in overseas markets, especially in an FDI, or simply investing in a mutual fund. As a sole investor living in your host country and investing in another, it is tough to understand the cultural intricacies and fine print like a local.

Rules and Regulations

The regulatory environment of a country is a significant factor for many investors. Regulations that are conducive to businesses and trusted and effective governance will attract more investors. It’s no coincidence that programs like SelectUSA, which makes foreign direct investments more accessible, create a competitive advantage and place the US as the top destination for foreign investors. Some countries have more restrictive trade, tax, and technology regulatory policies that can put a barrier on foreign investors and even limit their ownership in foreign companies and specific foreign industries.

As reported in the AT Kearney survey, today’s investors are looking at tax and data regulations in their investment countries. With a reliance on cross-border data flow for their operations, investors in foreign businesses report that data restrictions can significantly impact FDI, and compliance with these regulations can be costly. Many are also concerned about how data ‘nationalism,’ or actions by countries to maintain control of their data, can affect investments.

Infrastructure and Workforce

Before investing in overseas markets or directly in a foreign company, you should understand the company’s infrastructure and labor force. Does the country have an infrastructure to deal with and rebound from economic or political issues? Does the government have the technological infrastructure to remain competitive with other developed or developing countries?

When researching foreign investment opportunities, you should also examine the country’s unemployment rate and the availability of skilled workers in a particular field or industry. Is there a stable and robust workforce behind the foreign companies you are investing in? And, what are the costs of labor and transportation of goods or services?

Strong Overseas Markets for Investing

In the last few years, the countries that have continued to attract foreign investments — excluding the US — include:

• United Kingdom
• France
• China
• India
• Singapore
• Brazil
• Canada
• Italy
• Japan
• UAE
• South Korea

This is, of course, a partial list of all popular overseas markets and destinations for FDIs. Most countries that continue to benefit from foreign investments are highly developed economies, like those in Europe and North America. However, as China, Brazil, India, and other developing and emerging economies gain popularity, it is clear that you don’t have to stick with Europe and North America to find big success. Investors are looking to places like Thailand, Vietnam, Chile, Colombia, and more to diversify their portfolios and increase their returns. Finding smart investments in less-tapped overseas markets is possible, but only if you perform the right due diligence.

By following the practices outlined above, thoroughly researching, and knowing what level of risk you are willing to take, investing overseas can serve you and your portfolio very well.

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[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can listen to at your leisure, and each includes a comprehensive customer PowerPoint about the topic):

1. Trade Finance Basics
2. Raising Capital: Negotiating with Potential Investors
3. Advertising Aces: Maximizing Reach and ROI

This is an updated version of an article originally published in March 2019 and updated on April 15, 2021.]

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