EECS 1520 Lecture Notes - Lecture 15: Portfolio Investment, Capital Account
21 Jun 2018
School
Course
Professor
EECS 1520 Lecture 15 Notes
Introduction
Financial Account
The sale of patent rights by a U.S. firm to a Canadian firm reflects a credit to the U.S.
balance-of-payments account, and a U.S. purchase of patent rights from a Canadian firm
reflects a debit to the U.S. balance-of-payments account.
The capital account items are relatively minor (in terms of dollar amounts) when
compared with the financial account items.
The key components of the financial account are payments for (1) direct foreign
investment, (2) portfolio investment, and (3) other capital investment.
Direct Foreign Investment
Direct foreign investment represents the investment in fixed assets in foreign countries
that can be used to conduct business operations.
Examples of direct foreign investment include a firm’s acquisition of a foreign company,
its construction of a new manufacturing plant, or its expansion of an existing plant in a
foreign country.
Portfolio Investment Portfolio investment refers to transactions between countries
involving long-term financial assets (such as stocks and bonds) that do not affect the
transfer of control.
Thus, a purchase of Heineken (Netherlands) stock by a U.S. investor is classified as
portfolio investment because it represents a purchase of foreign financial assets without
changing control of the company.
If a U.S. firm purchased all of Heineken’s stock in an acquisition, this transaction would
result in a transfer of control and therefore would be classified as direct foreign
investment instead of portfolio investment.
54
EECS 1520 Full Course Notes
Verified Note
54 documents
Document Summary
The key components of the financial account are payments for (1) direct foreign investment, (2) portfolio investment, and (3) other capital investment. Direct foreign investment represents the investment in fixed assets in foreign countries that can be used to conduct business operations. If a u. s. firm purchased all of heineken"s stock in an acquisition, this transaction would result in a transfer of control and therefore would be classified as direct foreign investment instead of portfolio investment. The capital account items are relatively minor (in terms of dollar amounts) when compared with the financial account items. Foreign investment represents the investment in fixed assets in foreign countries that can be used to conduct business operations. Examples of direct foreign investment include a firm"s acquisition of a foreign company, its construction of a new manufacturing plant, or its expansion of an existing plant in a foreign country.
