The full form of FDI is Foreign Direct Investment. In brief, Foreign Direct Investment or FDI, is an investment made by an individual or a company of one country into business-related interests located in another country. Usually, the FDI implies a considerable level of influence or control over the operations of any such company, either through shares, joint ventures, or opening subsidiaries abroad. Foreign Direct Investment is the full form of FDI, which is international in nature and helps transfer capital, technology, and skills from one country to another.
Definition of FDI
FDI is defined as the acquisition of a controlling interest or ownership in a foreign enterprise or the creation of business operations in a foreign country. This contrasts with foreign portfolio investment (FPI), which represents the purchase of shares or stocks issued abroad because FDI has direct control and a much longer-term stake in the operations of the foreign entity involved.
FDI in India
The most sought-after place, India, has been driven largely by the huge market, booming economy, and favorable policies. IT, retail, automotive, and pharmaceuticals have been the chief beneficiaries. The Indian government has, during this time, made some efficient reforms within the country that have led to a vast improvement in FDI inflow, such as simplifying all processes, lifting barriers, and offering tax benefits. Recently, sectors like defense, telecommunications, insurance, and e-commerce have seen increased FDI participation due to liberalization by the government.
Are you interested in pursuing a career in Law? The Legal School in collaboration with IndusLaw has created a unique 4-month program for a Certification in Mergers & Acquisitions, Private Equity and Venture Capital Laws for fresh law graduates as well as professionals looking to advance in their careers! Enquire now for details!
FDI Purpose
The main purpose of FDI is to enable businesses to globalize, diversify risks, and explore new markets. Further, it enables businesses to achieve economies of scale, cheaper labor or resources, and advanced technologies. The overall objective of FDI is to enhance the business functions within the global business arena. FDI as a method of investment is used by companies to:
Directly access new markets and consumers.
Setting up a production base in some foreign country.
Acquisition of technological skills or competitive assets
Spread of risks due to operations extended into several countries
Accessing cheaper labor or raw materials in less developed economies
Working Mechanism of FDI:
The whole point of FDI usually is to invest in a foreign business directly by owning or controlling it. An investor can start participating in a new market by taking subsidiaries, acquiring shares of local companies, and even joint ventures. The whole point of doing FDI is that it lets the foreign investor take control or equity in a business that can be located in another country. It follows:
The destination of foreign investment is to be selected based on market potential, the availability of labour, and the business environment.
FDI can be done in several ways: through mergers and acquisitions, Joint ventures, and greenfield investment
FDI will be actively involved in management as well as the decision-making of the company in the foreign country
Profits and dividends yield from investment, thereby strengthening the economy of the investor nation as well as the host country.
Importance of FDI
FDI is very significant to the economic development of any country since it motivates a country to invite foreign capital, increase the levels of job creation, upgrade the infrastructure of a country, and transfer technology and expertise. FDI also encourages higher economic integration between countries which increase international trade and international direct investment. FDI has been identified to enhance the economic development of a country in several ways. Producing jobs and increasing employment for its people. Efficacious productivity through the transfer of technology and other management skills. Boosting foreign exchange reserves, helps equilibrate payments and stabilizes the economy. Promotes infrastructure development in a host country. Promoting Competition through increased efficiency and good consumer choice.
Postgraduation in law is being pursued by many students. Check out the online LLM courses available. Know about the best LLM colleges in India. Read LLM corporate law is the most followed legal field.
Types of FDI
Foreign Direct Investment (FDI) can be categorized into different types depending on the nature and mode of investment. Depending on the strategic goals for the investor and the host country, each serves them differently. Among the types is the following.
1. Horizontal FDI
Horizontal FDI is a direct investment by the company where it expands its process of production to the host country. The company produces or sells similar products or services in the foreign market as in the parent country. The motivation for this type of FDI is usually based on expansion in market presence and on the avoidance of trade barriers.
Example: A German car manufacturer that opens an Indian-based factory to manufacture and sell the same cars in the local Indian market.
2. Vertical FDI
Vertical FDI refers to a firm investing in another firm sited outside its country whose operations either provide inputs or distribute outputs for the investing firm's production chain. There are two categories of vertical FDI
Backward Vertical FDI: Such kind of FDI is where the company invests in a foreign entity, which manufactures the raw material or provides with components for its manufacturing.
Forward Vertical FDI: A company invests in a foreign entity which would sell or distribute its finished products.
Example: A smartphone company investing in a component manufacturing firm in China (backward integration) or setting up a retail chain in the US to sell its products (forward integration).
.
3. Conglomerate FDI
Conglomerate FDI: A firm invests in a host country in an entirely unrelated industry to its own. This is rare since the investing firm must venture into a new industry with little or no experience. The main rationale behind conglomerate FDI is diversification strategies to reduce risks.
Example: UK software firm investing into Australian clothing brand.
4. Greenfield FDI
Greenfield FDI is one such type of FDI through which a firm establishes completely new operations in a foreign location from scratch. This can be a new production plant or office space or retail space. Greenfield investments generally lead to more direct involvement by the investor in the host economy along with local employment generation and developments in the infrastructure.
Example: Opening new restaurants by a multinational food chain in a foreign country.
5. Brownfield FDI
Brownfield FDI is defined as when a firm invests in an existing business or facility in another country. It can also include mergers, acquisitions, or leasing facilities. Brownfield investments allow firms to expand rapidly in a host country without having to start new operations.
Example: Acquisition of an existing local manufacturing plant by a foreign pharmaceutical company.
6. Platform FDI
Platform FDI, also called export-oriented FDI, is an enterprise investing in a country to produce goods or services for export to another third country. This can happen in regions covered by trade agreements or simply where labor is cheap.
Example: A Japanese firm sets up a factory in Thailand to make goods to be exported to Europe.
7. Joint Ventures
A foreign company entering into a joint venture, in essence, forms a partnership with a domestic firm to establish a new venture. They share ownership, control, and profits. It is an extremely common form of FDI in industries where the host country does not allow foreign ownership.
Example: Car maker seeking to conduct a joint venture with a domestic enterprise for the production and sale of cars in the host country.
Benefits of FDI
FDI makes the host country better in several aspects, including the stimulation of economic growth, job creation, increased productivity, and overall business environment enhancement. To an investor, FDI provides new markets for expansion and sources of growth. FDI provides many advantages to both the investor and the host country:
Economic Growth: FDI results in increased production and economic activities of the host country.
Job Creation: Multinationals create jobs as well as raise the standards of the host country labour force.
Technology Transfer: Companies introduce new high technology and best practices to improve production and productivity
Capital Inflow: It finances current account deficits and boosts foreign reserves of the country
Risk Diversification: For the investor, FDI is a window to enter new markets and diversify risk
Disadvantages
Advantages apart, FDI will lead to some negative effects, including loss of control to the local firms, profit repatriation to the investor's home country and potential environmental damage, along with capital dependence, which makes the economy fragile on external factors. Among its many merits, FDI can also have some demerits:
It leads to loss of control to the domestic companies. Foreign investors might influence strategic decisions.
Profit repatriation: The majority of the profits generated by the foreign-owned firms are siphoned back to the investor's home country, meaning there is little of these profits remaining in the host economy.
Environmental degradation: Some foreign investment, especially in extractive industries, leads to environmental degradation.
Dependence on foreign capital: Overreliance on FDI makes an economy vulnerable to external shocks or the withdrawal of foreign investments.
Government Initiatives to Increase FDI
Governments around the world from Europe to Asia and Africa—have undertaken various initiatives to attract and encourage FDI into their economies. Some such steps for India are as follows:
Liberalized FDI policies in certain sectors such as defense, insurance, and aviation sectors, where up to 100% FDI have been permitted in a few areas.
Streamlined procedures for approval of FDI, especially in the case of automatic route wherein preapproval from the government are not required.
Provide tax benefits, such as reduced corporate tax rate, to make India an investment-friendly country.
Develop SEZs for infrastructure and incentives to foreign companies.
Bilateral trade agreements and investment treaties to protect the interest of foreign investors.
Conclusion
Foreign Direct Investment is an important factor in developing the world economy as it increases international trade, aids in the transfer of technology, and fosters employment. FDI builds mutual advantages for the investor and the host country as an interface between their economies. The positive aspects of the FDIs may include economic growth, employment generation, and productivity improvement, while the negative aspects are profit repatriation and dependence on foreign capital. For its part, each government around the world, from India to large-scale global users of FDI, has been making a serious effort to attract this kind of flow: liberalization of policies and tax incentives have largely been practiced for this purpose. The economic development and integration into the global market require important indispensable engines, which FDI has remained as well for both developing and developed nations.
FDI Full form FAQs
1. What does the short-form FDI stand for?
FDI stands for Foreign Direct Investment. It is a form of investment by a company or an individual in one country in a business interest located in another country.
2. What are the types of FDI?
Types are horizontal FDI, vertical FDI, conglomerate FDI, greenfield FDI, brownfield FDI, platform FDI, and joint ventures.
3. Which sectors in India have benefitted the most from the FDI?
Indian sectors that have received maximum benefits from the FDI include IT, retail, pharmaceuticals, automobiles, defense, telecom, and e-commerce.
4. Why is FDI important to a country?
Because FDI promotes economic growth, generates employment, transfers technology, develops infrastructure and enhances competition within the host country.
5. What are the disadvantages of FDI?
The disadvantages of FDI are: loss of control by the domestic companies, profit repatriation, damage to the environment, and overdependence on foreign capital, which makes the economy vulnerable to external shocks.
