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    Foreign Direct Investment

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    Dr. Swati Gupta
    Foreign direct investment (FDI) involves a company from one country making a direct investment in a business in another country. There are three main types of FDI: horizontal FDI duplicates a company's operations in another country; platform FDI uses a host country to export to a third country; and vertical FDI performs value-adding activities across different countries. FDI can benefit recipient countries through economic development, technology transfers, job creation, and income generation for the government. However, it may also result in job losses, less employment opportunities for unskilled workers, price wars that hurt local businesses, and loss of foreign currency. India's FDI policy allows investments through an automatic route or government route, and future F

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    Foreign Direct Investment

    Uploaded by

    Dr. Swati Gupta
    76 views4 pages
    Foreign direct investment (FDI) involves a company from one country making a direct investment in a business in another country. There are three main types of FDI: horizontal FDI duplicates a company's operations in another country; platform FDI uses a host country to export to a third country; and vertical FDI performs value-adding activities across different countries. FDI can benefit recipient countries through economic development, technology transfers, job creation, and income generation for the government. However, it may also result in job losses, less employment opportunities for unskilled workers, price wars that hurt local businesses, and loss of foreign currency. India's FDI policy allows investments through an automatic route or government route, and future F

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    Foreign Direct Investment

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    Foreign direct investment (FDI) involves a company from one country making a direct investment in a business in another country. There are three main types of FDI: horizontal FDI duplicates a company's operations in another country; platform FDI uses a host country to export to a third country; and vertical FDI performs value-adding activities across different countries. FDI can benefit recipient countries through economic development, technology transfers, job creation, and income generation for the government. However, it may also result in job losses, less employment opportunities for unskilled workers, price wars that hurt local businesses, and loss of foreign currency. India's FDI policy allows investments through an automatic route or government route, and future F

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    76 views4 pages

    Foreign Direct Investment

    Uploaded by

    Dr. Swati Gupta
    Foreign direct investment (FDI) involves a company from one country making a direct investment in a business in another country. There are three main types of FDI: horizontal FDI duplicates a company's operations in another country; platform FDI uses a host country to export to a third country; and vertical FDI performs value-adding activities across different countries. FDI can benefit recipient countries through economic development, technology transfers, job creation, and income generation for the government. However, it may also result in job losses, less employment opportunities for unskilled workers, price wars that hurt local businesses, and loss of foreign currency. India's FDI policy allows investments through an automatic route or government route, and future F

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 4

    Foreign Direct Investment

    What is Foreign Direct Investment


    FDI is a direct investment in a business enterprise in one country by a company located in
    another country either by buying a company of that country or by expanding its existing
    business in that country. Broadly, foreign direct investment includes mergers and
    acquisitions, building new facilities and reinvesting profits earned from overseas operations.
    In a narrow sense, foreign direct investment relates just to build new facilities.
    FDI is defined as the net inflows of investment and to acquire a company of another country
    or investing in lasting management interest in an enterprise operating in an economy other
    than that of the investor. FDI is the sum of equity capital, long-term capital, and short-term
    capital as shown in the balance of payments. FDI can be in the form of participation in
    management, joint-venture, transfer of technology and expertise. Stock of FDI is the net
    cumulative FDI for any given period. Direct investment does not include investment through
    purchase of shares.
    Importance of FDI
    FDI is one important means for a country which has limited amount of resources and capital
    can progress by getting finance and other resources from the opulent countries. FDI is
    having pros and cons as we will discuss in this article, but if allowing FDI after carefully study
    all the factors will play an important role in fast growth of the country.

    Types of FDI
    1. Horizontal FDI
    It arises when a firm duplicates its home country-based activities as it is without any change
    in host country through FDI. Horizontal foreign direct investments happen when any MNC
    carries out a similar business operation with no change in different countries. Foreign Direct
    Investment is done due to different motives in different countries. FDIs that are undertaken
    to strengthen the existing market structure or explore the opportunities of new markets can
    be called "market-seeking FDIs." "Resource-seeking FDIs" are based on factors that if
    production is done in some other country then more operational efficiency can be achieved
    than those available in the home country of the investor. Some foreign direct investments
    involve the transfer of strategic assets. FDI activities may also be carried out to ensure good
    optimization of opportunities and economies available in host country. In this case, the
    foreign direct investment is termed as "efficiency-seeking."
    2. Platform FDI
    This type of foreign direct investment from a source country into a destination country for
    the purpose of exporting to a third country. Host country provides the platform and assists
    in exporting due to rules and regulation of host country permitting exports easily.

    3. Vertical FDI
    It takes place when a firm through FDI moves upstream or downstream in different value
    chains or when firms perform value-adding activities stage by stage in a vertical fashion in a
    host country. Value is added in stages and in various countries. Vertical Foreign Direct
    Investment takes place when a multinational corporation owns some shares of a foreign
    enterprise, which supplies input for it or uses the output produced by the MNC.

    Methods of FDI
    Following are the ways through which foreign direct investor acquire voting power of an
    enterprise in an economy:

    By establishing a wholly owned subsidiary or company anywhere


    Acquiring an enterprise or buy shares in that enterprise
    Merger or an acquisition can be a good choice
    Participating in an equity joint venture with another investor

    Advantages of FDI
    Economic development
    Foreign direct investment helps in the economic development of the particular country
    where the investment is being made. FDI especially applicable for the economically weak
    and developing countries. During 90s the foreign direct investment for most of the countries
    that were growing from an economic perspective was one of the major external sources of
    financing. FDI has helped several countries in their economic hardships. An example of this
    could be seen in some countries of the East Asian region. It was observed during the
    financial problems of 1997-98 that the amount of foreign direct investment was made in
    sufficient amount. The other forms of cash inflows in a country like debt flows and portfolio
    equity had suffered major setbacks
    Transfer of technologies
    Transfers of technologies are also permitted through foreign direct investment. This is
    accomplished by provision of capital inputs. It also assists in the promotion of the
    competition within the local input market of a country.
    Human capital resources
    HR resources can be sent to other invested countries as a part of foreign direct investment
    from host country to receive training on the operations of a particular business. The profits
    generated by the foreign direct investments that are made in that country can be used for
    the purpose of making contributions to the revenues of corporate taxes of the recipient
    country.

    Job opportunity
    FDI helps in the creation of new jobs in invested country which helps in increasing the
    salaries of the workers. This will improve the way of life of the person. It has normally been
    observed that FDI allows for the development of the manufacturing sector and many other
    sectors of the invested country. FDI can also bring in advanced technology and skill set in a
    country.
    Income generation
    FDI increase the revenue income that comes through taxation. It also plays a crucial role in
    the context of rise in the productivity of the host countries. In case of countries that make
    FDI in other countries income generation has positive impact as well. Recipient countries
    companies get an opportunity to explore newer markets and thereby generate more
    income and profits.
    Export/Import
    Through FDI the recipient country cash in on their superior technological resources. The rate
    of interest is maintained at lower level as a result of receiving foreign direct investment
    from other countries.
    It becomes easier for the business entities to borrow finance at lesser rates of interest. The
    biggest beneficiaries of these facilities are the small and medium-sized business
    enterprises.

    Disadvantages of FDI
    Job loss
    In India organised sector is very smaller compare to organised sector. For ex: Retail. If
    organised sector keeps growing due to FDI then they will employ less no of persons leading
    to job loss as they will replace many intermediaries and brokers.
    Less Employment
    Due to more FDI the employment will be less illiterate persons might not get employment
    only literate persons might be provided with employment opportunities.
    Price war
    As with FDI new technology and machines will be imported so as a result the production
    cost will be less, resultant will be less cost. But unorganised sector production cost will still
    be more. So unorganised sector survival will be tough and persons will start losing jobs.
    Foreign Currency loss
    FDI in various sectors will drain out the countrys foreign currency and will make the
    economy weaker.

    Foreign Investments in India


    As per the Department of Industrial Policy and Promotion, Ministry of Commerce and
    Industry, Government of India issues a FDI Policy Circular on March 31 of each year
    explaining the policy in respect of FDI in India. Under the Foreign Direct Investments (FDI)
    Scheme, investments can be made in shares, mandatorily and fully convertible debentures
    and mandatorily and fully convertible preference shares of an Indian company by non
    residents through two routes:
    Automatic Route
    In this the investor requires no approval from the Reserve Bank or Government of India for
    the investment.
    Government Route
    In this the foreign investor should obtain prior approval of the Government of India for the
    investment.

    Future of FDI in INDIA


    From 1991 till 2009 the government is putting special efforts in attracting FDI in various
    sectors in India. For the first time in 12th Fifth year plan Planning Commission for the first
    time has laid down three scenarios on growth linking them to clearly actionable steps.
    According to it 8.2% growth is possible when various development projects are
    implemented in fast track. FDI should be the key policy imperative to help achieve the
    desired growth. It goes on to project an abysmally-low rate of 5% growth in a scenario of
    "policy logjam". This is the time for us to introspect on the basic factors responsible for
    foreign investments going away from India. The FDI policy is not so clear and transparent
    and failed to offer comfort to foreign investors. Investment decisions are not dependent on
    whether the sector is under automatic approval route, but on clarity of investment rules.

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