What is Foreign Direct Investment?
FDI or Foreign Direct Investment is an investment made by an individual, group, or organization in any business or any organization located in another nation. The foreign direct investors enjoy the lasting interest in the amount invested in overseas business. These investors get profits from the profit of the organization and bear loss from the company’s loss. Expanding the existing business by taking it to other nations also comes under foreign direct investment. For example, if an internet service provider from India acquires certain smartphone stores in the USA then it is called a Foreign Direct Investment (FDI). Foreign direct investment mutually benefits both the countries from where investment is being done and the country where investment has been done. FDI not only boosts the economies but also helps in maintaining friendly relations among the nations.
In India, by the then finance minister, Dr. Manmohan Singh of prime minister P.V. Narasimha Rao’s Govt, in 1991, Foreign direct investment (FDI) was introduced under the Foreign Exchange Management Act (FEMA) and it commenced with the baseline of 1 billion dollars in 1990.
What is the lasting Interest and Element of Control in FDI?
If an investor succeeds in acquiring a minimum of 10% of the voting power in a company then he/she becomes eligible for the lasting interest in the respective firm. An investment is counted under foreign direct investment only if it generates lasting interest. While on the other hand, the element of control means having the authority to manage and take necessary actions in any firm. This is why a minimum 10% holding is considered necessary to consider an investment under FDI.
Difference between FDI and Foreign portfolio Investment:
In many instances, it has been observed that Foreign Direct Investment (FDI) is mistaken for Foreign Portfolio investment.
| Foreign Direct Investment (FDI) | Foreign Portfolio Investment (FPI) |
|---|---|
| An investment made in an overseas company that enjoys lasting interest and holds a significant stake in the company. | An investment made by an investor in the financial asset of a foreign company. |
| FDIs are more stable and are for the long term. | FDIs are volatile and are for the short term. |
| The investor holds the right to influence operations. | The investor does not hold the right to influence operations. |
Types of Foreign Direct Investment (FDI):
- Horizontal FDI: It is the most common type of FID wherein a foreign investor invests in the same type of industry overseas similar to the one which he is operating in his country. For example, the German-based company Mercedes invests in the TATA Motors of India.
- Vertical FDI: This type of FDI occurs when a company invests in a foreign company, that may not belong to the same industry but can help the main company by supplying or selling products required in the parent company. For example, Dominos buys agricultural land in India to cultivate wheat in India to meet the demand for flour in the making of pizza.
- Conglomerate FDI: This is an uncommon type of FDI in which an investment is done by a foreign investor in a completely different industry. In this type of FDI, there is no link between the two industries. For example, consider American E-commerce company Amazon investing in Tata motors from India.
- Platform FDI: In this kind of FDI, a foreign investor expands his/her business to the other country but exports the manufactured product to the other countries. For example, a German motor company establishes its manufacturing plants in UAE and exports it products of the Middle East-Asian countries.
Advantages and Disadvantages of FDI:
Advantages:
- Foreign direct investment benefits both the investor and the country where the investment is being done.
- FDI helps a nation in diversifying its existing market.
- FDI in tax-free countries like Dubai results in a decent profit for the investors. While investment in developing nations like investors gets manpower at a lower cost while providing employment opportunities to the host country.
- FDI helps nations in rapid economic growth and provides a chance to share the latest technologies of two nations that would mutually benefit both nations.
- FDI boosts employment opportunities in a nation.
Disadvantages:
- The local small-scale business gets adversely affected by the entry of big international firms via FDI.
- FDI attracts more industries and thus results in increasing pollution.
- Foreign companies spend huge sums of money on branding and promotion thus increasing the cost of the product thus leading to inflation.
- Political corruption is the main disadvantage of FDI as in many cases it has been seen that political leaders take bribes from foreign investors to allow FDI.
- FDI not only brings in new business but also brings in a new culture and thus eroding the existing culture of a nation.
Current scenario of (Foreign Direct Investment) FDI in India:
Apart from being a significant non-obligation monetary asset for the economic growth of India. Foreign direct investment also plays a crucial role in the monetary development of India. Foreign investors invest their money in India to get labor at a lower cost, fewer taxes, and natural resources. However on the other hand India also gets benefited from these FDIs as it brings in new technology and innovation from different parts of the world. The Indian government adopts favorable policies toward FDI thus attracting more foreign investment.
As per the report of DPIIT (Department for Promotion of Industry and Internal Trade) between the years, 2000 and 2021 the total FDI equity flow in India was around 560.78 Billion USD, which reflects the progressive steps taken by the Indian government to attract FDI. Between July-September, 2021 the total FDI in India was around USD 19.77 billion, and for the same period, the total FDI equity inflow was USD 13.58 billion.
Routes for FDI in India:
Primarily there are two major routes for FDI in India via which foreign investors can make investments in India.
- Direct Route/Automatic Route: By this route, foreign investors can easily invest money in any Indian firm without seeking permission from the Government of India and RBI.
- Approval Route: In this route, no investment can be made in India by a foreign investor without the permission of the Indian government or RBI.
FDI Prohibited sectors in India:
In India, there are some sectors in which the FDI is prohibited by the GOI due to some security reasons and some of these sectors are listed below.
- Atomic and nuclear energy sector
- Lotteries and chit funds
- Gambling business
- Housing and real estate sector
- Tobacco and cigarette industry
Government of India Initiatives to increase FDI in India:
There are some major steps taken by the GOI to increase the inflow of FDI in India and some of these steps are mentioned below.
- The government of India is planning to provide ease in scrutiny of FDI in India.
- With the latest government measures like the GIS-mapped land bank, PM Gati Shakti, single-window clearance is expected to boost FDI inflows in 2022.
- In 2021, UK and India have agreed to extend their bilateral bond to provide an investment boost via an Enhanced trade partnership.
- The government of India is likely to announce three new policies in 2022, under the space activity bill, that boost FDI in the Indian aerospace sector.
- Making amendments to the foreign exchange management rules of 2019, in 2021 GOI increased the FDI limit up to 74% in the insurance sector.
- In the telecom sector, GOI announced to allow 100% FDI in 2021, from the previous 49% FDI.