Foreign direct investment(FDI) is defined as an investment made by a company or an individual from one country into the shares and securities of another company that operates in a different country. Businesses that accept FDI are known as MNCs (multinational companies) or MNEs (multinational enterprises).
In general, FDI occurs when an investor conducts foreign business operations or acquires foreign business properties, such as acquiring ownership or control of a foreign corporation.
Foreign Direct Investment ) is often made in open economies with a skilled workforce and a strong growth potential. FDIs bring more than just money; they also bring expertise, technology, and information.
Types of FDI
There are only two forms of foreign direct investment in general. However, two other forms of FDI have been observed. Below is a list of the FDI categories along with their description.
- Horizontal Foreign Direct Investment: The company extends its domestic activities globally. The business will continue to operate in the same manner, but not in its home country. It will carry on its operations in a host country. For example, Unilever, Nestle, and more.
- Vertical Foreign Direct Investment: A company extends its national operations abroad by opting for a varied supply chain level in this form of foreign direct investment. This implies that the organization engages in a variety of operations in the host country, all of which are relevant to the primary sector. Example: Apple, MS, and more
- Conglomerate Foreign Direct Investment: An organization acquires an unrelated corporation in a host country through a conglomerate foreign direct investment. However, since the business must clear two obstacles to gain admission this can be unusual. For instance, Walmart, a US retailer, may invest in BMW, a German automobile manufacturer.
- Platform Foreign Direct Investment: When a corporation enters an international market and exports the outputs of its foreign business activities to another country. This type of foreign direct investment is also known as export-platform foreign direct investment. For example, if Ford purchased manufacturing plants in Ireland with the primary purpose of exporting cars to other countries in the European Union.
Role of FDI
When it comes to making cross-border investments, FDI plays a significant role. It can provide access to newer markets, new and improved technology, and other benefits to a company or person. FDI can also help a company or person develop new skills, reduce production costs, increase output, gain a competitive advantage, increase income, increase exposure, and so on.
The foreign company and the host country that receives investments will gain access to advanced technology and new skills, as well as lay the groundwork for economic growth.
FDI in India
Foreign Direct Investment (FDI) is a significant source of funds for India’s economic growth. Following the 1991 crisis, India began to liberalize its economy, and foreign direct investment has steadily increased since then. India is now a member of the top 100 countries for Ease of Doing Business (EoDB) and ranks first in the world for greenfield FDI.
How it came to India?
India’s Foreign Direct Investment routes
- Automatic route: For FDI, a non-resident or Indian company does not need the RBI’s or the government of India’s prior approval
- Government route: Government approval is needed. The business must apply to the Foreign Investment Facilitation Portal, which allows for single-window clearance. The application is then forwarded to the appropriate ministry, which will accept or deny it in consultation with the Ministry of Commerce’s Department for Promotion of Industry and Internal Trade (DPIIT). The DPIIT will publish a Standard Operating Procedure (SOP) for handling FDI.
Benefits of FDI
Foreign direct investment has many advantages. The benefits of FDI can be reaped by multinational corporations as well as foreign countries. Foreign direct investments may support one of the two, or both of them at the same time. The following are some of the benefits of foreign direct investments for multinational corporations:
- Access to National and Foreign Markets – This is a great way for a company or person to expand into the international market.
- Access to Important Resources – It can also grant access to a country’s natural resources, such as fossil fuels and precious metals, to a person or an organization. Oil sale firms, for example, also make foreign direct investments in order to expand oil fields.
- Lowers Production Costs – Foreign direct investments will reduce the manufacturing costs. FDI allows businesses to outsource manufacturing work to firms in other countries in order to save money. It contributes to the growth of new industries. It also provides innovative business opportunities, practices, economic principles, management methods, and technology to local and national governments, individuals, and local agencies to aid in the development of local entities and industries.
Disadvantages of FDI
- A country’s competitive advantage can be boosted by foreign direct investments. If foreign ownership of entities occurs in strategically critical and hypersensitive sectors, this can significantly reduce a country’s competitive advantage.
- Investors that make foreign direct investments may not add value to the business, but they may obstruct its operations. Foreign investors can sell a company’s unprofitable segments to low-grade local investors.
- Foreign investors may also take advantage of the entity’s leverage securities to secure low-cost local loans. It’s also possible that international investors will not reinvest but will instead reissue funds to the holding firm.
- Another disadvantage to foreign direct investment is profit repatriation. Companies are prohibited by FDI from reinvesting income gained in the host nation. Larger capital flows out of the host country as a result of this.
FDI Inflow in India
India received the highest-ever FDI inflow of $64.37 billion in the fiscal year that ended in March 2019. Inflows of foreign direct investment were $45.14 billion in 2014-15 and $55.55 billion the following year.
FDI is an investment in a company’s financial securities that exist in a foreign country made by a company or an entity. The foreign investment enables businesses to gain access to new markets, technological advances, and expertise, as well as reduce manufacturing costs and increase profit margins. The investment entails the growth of the host country’s overall economy. The holding company’s volatile nature, on the other hand, can be a disadvantage at times.