Foreign Direct Investment (FDI)

Introduction

• Foreign direct investment (FDI) is an investment made by a firm or individual in one

country into business interests located in another country. Generally, FDI
takes place when an investor establishes foreign business operations or acquires
foreign business assets, including establishing ownership or controlling interest in a
foreign company.

• Foreign direct investments are distinguished from portfolio investments in which an

investor merely purchases equities of foreign-based companies.

• FDI usually involves participation in management, joint-venture, transfer of

technology and expertise.

• FDI, a subset of international factor movements, is characterized by controlling

ownership of a business enterprise in one country by an entity based in another
country. Foreign direct investment is distinguished from foreign portfolio
investment, a passive investment in the securities of another country such as
public stocks and bonds,

• Apart from being a critical driver of economic growth, foreign direct investment (FDI)
is a major source of non-debt financial resource for the economic development of
India. Foreign companies invest in India to take advantage of relatively lower wages,
special investment privileges such as tax exemptions, etc.

• The Indian government’s favourable policy regime and robust business environment
have ensured that foreign capital keeps flowing into the country. The government
has taken many initiatives in recent years such as relaxing FDI norms across sectors
such as defence, PSU oil refineries, telecom, power exchanges, and stock exchanges,
among others
 Types of foreign direct investments

1. Horizontal FDI:

It is the investment done by a company or organization which practices all the tasks
and activities done at the investing company, back at its own country of operation.
Therefore, basically such investors are from the same industry where investments
are done but operating in two different countries.

For example: A car manufacture in Australia invests in a car manufacturing company

of india.

2. Vertical FDI:

The industry of the investor and the company where investments are done are
related to each other.

3. Forward Vertical FDI:

 In such investments, Foreign investments are done in organizations which can take
the products forward towards the customers.

 For example: A car manufacturing company in Australia invests in a wholesale car

dealer company in india.

4.Backward Vertical FDI:

 In such investments, foreign investments are done in an organization which is

involved in sourcing of products for the particular industry.

 For example: The car manufacturer of Australia invests in a tier manufacturing plant
in india.

5.Conglomerate FDI:

 Such investments are done to gain control in unrelated business segments and
industries in a foreign land.
 For example: The car manufacturer of Australia invests in a consumer durable good
manufacturer in a india.

6.Greenfield entry:

 A green field investment is a type of foreign direct investment where builds its
operations in a foreign country from the ground up. In addition to the construction
of new production facilities, These projects can also include the building of new
distributions hubs, offices and living quarters .

7. Foreign Takeover:

 This type of FDI takes the firm of foreign merger, acquisitions or takeover of an
existing foreign company.

Advantages of Foreign Direct Investment

• Economic Development Stimulation.

Foreign direct investment can stimulate the target country’s economic development,
creating a more conducive environment for you as the investor and benefits for the
local industry.

• Easy International Trade.

Commonly, a country has its own import tariff, and this is one of the reasons why
trading with it is quite difficult. Also, there are industries that usually require their
presence in the international markets to ensure their sales and goals will be
completely met. With FDI, all these will be made easier.

• Employment and Economic Boost.

Foreign direct investment creates new jobs, as investors build new companies in the
target country, create new opportunities. This leads to an increase in income and
more buying power to the people, which in turn leads to an economic boost.

• Tax Incentives.
Parent enterprises would also provide foreign direct investment to get additional
 expertise, technology and products. As the foreign investor, you can receive tax
incentives that will be highly useful in your selected field of business.

• Resource Transfer.
Foreign direct investment will allow resource transfer and other exchanges of
knowledge, where various countries are given access to new technologies and skills.

• Increased Productivity.
The facilities and equipment provided by foreign investors can increase a
workforce’s productivity in the target country.

Disadvantages of Foreign Direct Investment

• Hindrance to Domestic Investment.

• Risk from Political Changes.

• Negative Influence on Exchange Rates.

• Higher Costs.

• Economic Non-Viability.

• Expropriation.

• Negative Impact on the Country’s Investment.

• Modern-Day Economic Colonialism.

Strategies for attracting quality FDI

1. Open markets and allow for FDI inflows.

 Reduce restrictions on FDI. Provide open, transparent and dependable conditions

for all kinds of firms, whether foreign or domestic, including: ease of doing business,
access to imports, relatively flexible labour markets and protection of intellectual
property rights.

2. Set up an Investment Promotion Agency (IPA).

 A successful IPA could target suitable foreign investors and could then become the
link between them and the domestic economy. On the one side, it should act as a
one-stop shop for the requirements investors demand from the host country.

3.Think carefully about sectors/activities to be targeted.

 Investment and location decisions of suppliers may be dependent on those of prime

multinational investors in the host economy

4. Put up the infrastructure required for a quality investor:

 such as sufficient close-by transport facilities (airport, ports), adequate and reliable
supply of energy, provision of an adequately skilled workforce, facilities for the
vocational training of specialized workers, ideally designed in cooperation with the
investor (Ibid.).

5. Strengthen backward linkages from FDI into the indigenous economy.

 Allow for the competitive pressure of foreign entrants on their local suppliers to
raise competitiveness of the latter and allow for multiple forms of direct assistance
from foreign to domestic firms, in the form of training, help with setting up
production lines, management coaching regarding strategy and financial planning,
financing, assistance with quality control and introduction to export markets

6.encourage spillovers from FDI into the indigenous economy.

 Local firms set up by managers who had started in multinational firms are more
successful and more productive than others. Managers of local firms gain knowledge
of new technologies and marketing techniques by studying and imitating their
multinational competitors. Similarly, worker movements from multinational to local
firms spread knowledge and skills.

7. Encourage first-time foreign direct investors.

 Foreign firms that are not already part of an extensive network of subsidiaries are
readier to accept linkages to domestic suppliers.
8. Encourage foreign direct investors from Diaspora members.

 These are also more likely to generate linkages to domestic firms and contribute to
the internationalization of the host country.

9. Provide access to credit by reforming domestic financial markets.

 Setting-up a business-friendly financial system helps indigenous firms to respond to

challenges and impulses from foreign entrants, to self-select into supplier status, and
to thereby grow and prosper.

10. Set up a vendor development programme to support the match making process
between foreign customer and local supplier.

 To strengthen the capacity of the domestic economy, it may offer financing

opportunities to indigenous suppliers for required investment on the basis of
purchase contracts from foreign buyers , or reimburse the salary of a manager in a
foreign plant acting as a talent scout among domestic suppliers.

11. Refocus the “Who Is Us?” perspective and address related concerns
adequately.

 “Us” should be understood as the firms that are most beneficial to the domestic
economy irrespective of the nationality of their owners. Therefore, the firms that
create the highest-skilled and highest-paying jobs, the least-expensive products, and
the most competitive exports are considered.

12. Be patient and rely on the gradual structural transformation of the domestic
economy.

 Investors may come in waves. For example, first, investors in thermionic tubes,
valves and transistors, then, in television and broadcasting systems, and finally, in
computers, computer peripherals, and data processing systems. Along such avenues,
FDI may contribute to diversifying and upgrading domestic production.
 FDI Trends In India

FDI ALLOWED SECTORS

• Engineering & Manufacturing sectors

• Roads & Highways, Ports and Harbors

• Industrial model towns/industrial parks

• Hotels & Tourism

• Pollution Control and Management

• Advertising & Film industry

• Power generation (hydro-electric, coal/lignite, oil or gas based)

• Information Technology including E-Commerce

Sector Wise Distribution

 Trends in India

• Foreign Direct Investment in India increased by 3675 USD Million in January of 2019.

• Foreign Direct Investment in India averaged 1341.88 USD Million from 1995 until
2019, reaching an all time high of 8579 USD Million in August of 2017 and a record
low of -1336 USD Million in November of 2017.