The capital account

Direct investment and portfolio investment

As mentioned in the discussion of investment income, the difference between direct investment and portfolio investment revolves around whether or not the investor intends to take an active role in the management of the enterprise, the assets of which are being acquired.In many cases there is no ambiguity.Bonds, debentures and the like are clearly portfolio investment insofar as they confer no management or voting rights on their owners.On the other hand, foreign branches, wholly owned subsidiaries and joint ventures are clearly direct investments.Since ownership of at least some voting stock is usually seen as a requirement for direct investment status, it is increasingly difficult to establish the distinction between direct investment and portfolio investment as the proportion of foreign ownership falls or is dispersed among various owners and economies.Most countries solve the problem based on the percentage of foreign ownership by a single investor in the enterprise.If foreign single investor ownership is above a certain percentage, the investment is considered as direct investment; below this percentage it is considered as portfolio investment.

Other capital

The next component of the capital account is referred to as “other capital”, which is a residual category that groups all the capital transactions that have not been included in direct investment, portfolio investment and reserves.It is divided into long-term and short-term capital and, because of its residual status, can differ from country to country.Generally speaking, other long-term capital includes most non-negotiable instruments of a year or more like bank loans and mortgages.Other short-term capital includes financial assets of less than a year such as currency, deposits and bills.