What is FDI?

Foreign direct investment (FDI) is when a company controls the ownership of a business entity in another territory or country. With FDI, foreign companies are directly involved in day-to-day operations in the other country. This means that they bring with them not only money but also knowledge, skills, and technology.
FDI generally occurs when an investor establishes foreign business operations or acquires foreign business assets, including establishing ownership or controlling interest in a foreign company. In this article, we will deal with the question that what is FDI.

Meaning of FDI

Foreign direct investment, or FDI, is one of the most important channels of direct investment between countries. Unlike Foreign Portfolio Investment or FPI, an investor in one country can hold a controlling interest in any business or organization in the foreign country that receives the investment. FDI is also an important and incisive indicator of a country’s political and socio-economic stability.

This essentially means that a country that regularly receives large amounts of investment from foreign entities is more likely to have a dynamic and vibrant economy.

Importance of FDI

Foreign direct investment is very important for developing countries. Organizations of such nations need foreign funding to expand internationally. Such funding enables these organizations to expand sales abroad. In addition, with foreign direct investment, developing countries receive funds to:

• Infrastructure
• Energy
• Water
• Combating the effects of climate change

Foreign direct investment paves the way for the development of trade agreements. One of the best examples is NAFTA, the North Atlantic Free Trade Agreement (NAFTA).

How FDI works?

Organizations looking forward to FDI will select only those businesses that have an efficient and skilled workforce. Organizations usually look for such businesses in countries with open economies. That’s because, in such open markets, investors’ growth prospects are above average. Another important factor in choosing a foreign location for FDI is tax regulations. Naturally, places with mild tax regulations are preferred.

The scope of foreign direct investment is wider and larger than capital investment. It includes the following:

• Providing management
• Technology provision
• Provision of facilities
• Establishing a substantial level of control over foreign trade
• The ability to influence foreign trade decisions.

Advantages of FDI

FDI brings many benefits to a country. Some of them are described below.

• It brings financial resources for economic development.
• It brings new technologies, skills, knowledge, etc.
• It improves job opportunities in the country.
• It brings a more competitive business environment to the country.
• It improves the quality of products and services in industries.

Disadvantages of FDI

Some disadvantages associated with Foreign Direct Investment include-

• It can adversely affect domestic investments and domestic companies.
• Small companies in the country may not be able to withstand the onslaught of multinational companies in their sector. There is a risk that many domestic firms will go out of business as a result of increased foreign direct investment.
• Foreign direct investment can also adversely affect a country’s exchange rates.

Types of FDI

Now you know what foreign direct investment is. Let’s hop onto its main types:

• Horizontal Direct Investment: Here one organization sets up and operates the same type of business in a foreign country as in its home country. For example, a British provider of computer products buys a chain of computer products stores in France.
• Vertical Investment: Here an organization in another country buys a complementary business organization. For example, a British furniture manufacturer acquires a stake in a foreign organization that supplies it with wood material.
• Conglomerate Investment: Here an organization invests in a foreign organization that has no similarity to its core operations. This is usually done as a joint venture because the home organization lacks experience.

FDI in India

FDI is an important source of money for India’s economic development. Economic liberalization began in India after the 1991 crisis and since then FDI has been steadily increasing in the country. Today, India is part of the top 100 Ease of Doing Business (EoDB) clubs and ranks first in Greenfield FDI globally.

Routes through which India receives FDI

The routes or ways to receive FDI in India are- 

• Automatic Route: Non-resident or Indian company does not require prior approval of RBI or the Government of India for FDI.
• Government route: The approval of the government is essential. The entity will apply through the Foreign Investment Facilitation Portal. The application is then forwarded to the relevant ministry, which approves/rejects the application in consultation with the Department of Industry and Internal Trade Promotion (DPIIT), Ministry of Commerce. DPIIT will issue a Standard Operating Procedure (SOP) for processing applications under the existing FDI policy.

Government measures to increase FDI in India

The government has taken several steps to increase Foreign Direct Investment in India mentioned as follows-

• Government schemes such as the Manufacturing Linked Incentives (PLI) scheme in 2020 for electronics manufacturing have been announced to attract foreign investment.
• In 2019, the Foreign direct investment policy amendment 2017 by the government, which allows 100% Foreign direct investment in automatic progression in coal mining activities, boosted Foreign direct investment inflow.
• Foreign direct investmentin manufacturing was already under the 100% automatic route, however, in 2019, the government clarified that investment in Indian contract manufacturing entities is also allowed under the 100% automatic route provided it is done through a legitimate contract.
• Further, the government has allowed 26% Foreign direct investment in digital sectors. The sector has a particularly high return in India as favorable demographics, significant mobile, and internet penetration, massive consumption along with the advent of technology provide a great market opportunity for foreign investors.
• The Foreign Investment Facilitation Portal (FIFP) is the Government of India’s online one-stop interface with investors to facilitate foreign direct investment. It is administered by the Department of Industry Support and Internal Trade of the Ministry of Trade and Industry.
• Foreign direct investment inflows are expected to grow further –
• As foreign investors have shown interest in the moves of the government to allow private trains to operate and airports to be offered.
• Valuable sectors such as defense manufacturing, where the government raised the Foreign direct investment limit under the automatic procedure from 49% to 74% in May 2020, are expected to attract large investments going forward.

Final words

Generally, the term is used to describe a business decision to acquire a substantial stake in a foreign business or to buy it outright to expand operations into a new region. The term is not usually used to describe an investment in shares in a foreign company itself. Foreign direct investment is a key element of international economic integration because it creates stable and long-term links between economies.