| Foreign direct investment (FDI) is made by companies, while foreign portfolio investment (FPI) is made by investors. Though investors are owners of the firm and the firm maximizes their wealth by investing overseas, past studies isolated these two investments completely. In recent years, researchers are showing increased interest in the relationship between FDI and FPI, but have yet to produce a thorough study. In this dissertation, we embark upon a systematic investigation of this relationship.; We built a theoretical framework of FDI and FPI relationship, reasoning that both investors and firms rationally diversify into international markets to take advantage of the increasing trend of globalization and more open foreign markets in order to reduce risks and increase returns. As investors have easy access to market information in a timely manner, including firms' operations, they observe and monitor FDI undertaken by a firm. They believe that the firm invests in the foreign country because it possesses additional information unavailable to the public, and thus mirrors the firm's investment.; Since investments are transparent, the firm must consider investors' reactions to its investments in foreign markets. The firm must increase wealth for investors, to be rewarded for such good decisions by educated investors, and similarly to get punished for poor decisions by the investors. Because stock markets are short-term oriented and sensitive to investor sentiment, finks believe that movement by investors provides a guide for investment, and thus follows this direction through investing in a country. Therefore, we hypothesize an interactive relationship between FDI and FPI, that test results of a series of FDI and FPI models support. |
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