Foreign Direct Investment, or FDI, is one of the most crucial channels of direct investments between countries. Unlike Foreign Portfolio Investment or FPIs, an investor in one country can hold a controlling stake of any business or organisation in a foreign country that receives the investment. FDI is also a significant and insightful indicator of a certain country’s political and socio-economic stability.
This essentially implies a country that receives large amounts of investments from foreign entities on a regular basis is more likely to have a dynamic and vibrant economy.
Foreign investments can be either ‘organic’ or ‘inorganic’. With organic investments, a foreign investor will pump in funds to expand and accelerate growth in established businesses. Inorganic investments are instances when an investing entity buys out a business in their target country.
In developing and emerging economies like India and other parts of South-East Asia, FDIs offer a much-needed fillip to businesses which may be in poor financial shape. The Government of India has undertaken several measures to ensure that larger chunks of investments pour into the country across sectors including defence production, the telecom sector, PSU oil refineries and IT.
Since Foreign Direct Investment is a non-debt financial resource, it has the potential to become a major driver of economic development in India.
Globalisation and internationalisation are 2 factors which made FDI possible. However, the celebrated Canadian economist Stephen Hymer, considered the ‘Father of International Business‘, theorised in the 1960s that foreign investments would continue growing rapidly because –
The following are the main types of Foreign Direct Investment-
|Horizontal||The first type is observed whenever a business expands and enters a foreign country via the FDI route without changing its core activities.
An example would be McDonald’s investing in an Asian country to increase the number of stores in the region.
|Vertical||Here, a business enters a foreign economy to strengthen a part of its supply chain without changing its business in any way.
If McDonald’s bought a large-scale meat processing plant in Canada or in a European country to bolster its meat supply chain in the target nation, it would amount to vertical FDI.
|Conglomerate||This 3rd type is noticed whenever a business invests in a foreign country and buys an entity which manufactures totally different products.
The idea is to add more business niches and start new journeys in other countries.
In the late 1980s, Sir Richard Branson’s Virgin Group launched clothing stores in France, called ‘Virgin Clothing’. The venture, however, failed miserably and very few outlets remain, mostly in the Middle-East.
|Platform||The last type refers to the expansion of a business to a foreign country, but everything manufactured there is exported to a third country. Platform FDI is seen in free-trade zones of FDI-hungry countries.
Almost all luxury items marketed by famous fashion brands are manufactured in countries like Bangladesh, Vietnam and Thailand. They are then sold in other countries, a clear case of platform FDI at work.
Over the last decade, India has witnessed a steady flow of Foreign Direct Investment. From pharmaceuticals to automobiles, textiles to railways, nearly every sector has received significant sums as foreign investment.
According to data presented in the ‘World Investment Report 2020‘, a report compiled by the UN, India received a record-breaking $51 billion as FDI in 2019 across sectors. By 2015, India had already overtaken both China and the United States in terms of FDI influx.
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The Importance of FDI cannot be undermined. It has resulted in infrastructure improvements, led to job creation, increased exports, and has helped the formal sector to a great extent.
Here are some notable examples of recent foreign investments in India –
Data show that the majority of Foreign Direct Investment in India came from 5 countries- Singapore, the USA, Japan, the Netherlands, and Mauritius.
The Foreign Direct Investments occur in India mainly via two routes i.e. the automatic route and government route.
In an Automatic route, an Indian company or a non-resident does not need any primary permission from RBI or government for conducting foreign investments in India.
Another route through which FDIs can occur in India is via the government route. In this, prior permission and approval will be needed compulsorily. By filling and submitting an application form through the Foreign Investment Facilitation portal, one can get clearance. The application will be forwarded to the respective ministry, on receiving of which, it will be approved or disapproved. On approval, based on the DPIIT’s Standard Operating procedure as per the existing FDI policy, the further FDI procedure can be taken ahead.
In the following sectors, FDI is strictly prohibited in India-
Despite its many benefits, FDIs have their share of cons. Following is an analysis of both these sides –
There is no doubt that Foreign Direct Investment will continue to rise in India exponentially. The Central Government has made some sectors 100% open to FDIs. India’s Airlines is one of these sectors. As more global players enter the domestic market, it is the consumers who will benefit the most due to intense competition.
Besides, it is expected that more FDI infusion will help flagship programs like ‘Make in India’ and ‘Stand up India.’ Once the economy opens up fully, analysts predict a flood of foreign investments will pour in.