FDI’s full form is Foreign Direct Investment, which is an ownership stake in a foreign company made by an investor, government, or company from another country. The term FDI refers to a corporate decision to buy a sizable portion of a foreign company or buy it altogether to expand operations to a new area. The phrase often does not refer to a stock purchase in a single overseas firm. FDI is important to global economic integration since it forges strong, long-lasting ties between nations’ economies.
What is FDI in simple words?
Foreign Direct Investment (FDI) is when companies invest in business activities overseas. For example, when an American corporation constructs a factory in India. Or when a Chinese company acquires a Canadian company.
Through FDI, businesses can produce and distribute products or provide services in other countries. It aids employment creation and introduces new technologies and talents to the country. The foreign firm acquires new clients and markets. The recipient nation receives investments to expand its economy.
Foreign Direct Investment Examples
- Samsung built manufacturing facilities in India. It now manufactures smartphones, refrigerators, and other electronics for the Indian market locally.
- Amazon has invested billions of dollars in India. In order to sell products online throughout India, they operate vast warehouse and logistics networks.
- Facebook, Google, and other tech giants invested substantial capital in Reliance Jio. This contributed to the expansion of 4G networks and digital services.
- Tata Motors partnered with foreign car makers to establish joint ventures. Car makers such as Nissan, Ford, and Fiat produce vehicles through these partnerships.
Objectives Of FDI
The primary objective of FDI is economic development. FDI contributes to the economic growth of the host country. It generates new capital, employment, tax revenue, skills and technology. This facilitates industrialization and infrastructure growth. Let’s also look at some additional FDI objectives.
Access to New Markets
Businesses invest overseas to gain access to larger consumer bases and to market their products/services. This helps in expanding their global market presence.
FDI projects generate a substantial number of jobs, both directly in foreign companies and indirectly in the industries that supply products and services to them. This lowers unemployment rates.
Technology and Skill Transfer
Foreign companies provide their local subsidiaries with modern machinery, management techniques, and technical know-how. This increases the productivity of the host country.
Access to Resources
Some countries invest abroad to access natural resources, raw materials, or operations with reduced costs. This ensures their long-term availability.
Major FDI investments frequently target sectors such as utilities, roads, and ports, among others. This serves to improve the infrastructure of the host nation.
FDI makes a considerable contribution, via corporation taxes, import charges, and other forms of taxation, to the total amount of revenue collected by the host government.
How Does FDI Work?
For a business to engage in FDI, it must first assess the potential opportunities and industries in the target foreign market. Extensive research and analysis are conducted to identify advantageous locations, industries, economic conditions, and business-friendly policies in the host nation. Based on this evaluation, the investing company either acquires existing assets like plants, equipment or an ongoing business enterprise. Alternatively, it may opt to establish brand-new manufacturing operations or facilities.
Once investment opportunities are identified, the foreign company applies to the host country’s FDI authority for the necessary regulatory approvals if investing in a regulated sector. The company then transfers the required capital from its home country abroad using financial instruments such as equity capital, reinvested earnings, and inter-company loans.
After obtaining the necessary permissions, the company opens a local subsidiary or branch office in the host country. This local entity is then responsible for carrying out the intended business operations, such as product manufacturing, service provision, resource extraction, and trading.
The subsidiary generates revenue, profits, and returns over time by selling products and services. Some of the profits are reinvested in expanding local operations, while others are repatriated to the parent company in the country of origin in the form of dividends or capital gains.
FDI benefits both the investing firm and the host country. The former obtains new clients and markets, while the latter receives investments, employment, skills, technology, and infrastructure, all of which contribute to the expansion of the global economy. Governments facilitate FDI by providing incentives and infrastructure to attract more foreign capital.
Types Of Foreign Direct Investment
The four types of foreign direct investment are Horizontal FDI, Vertical FDI, Conglomerate FDI and Platform FDI.
- Horizontal FDI
This type of FDI occurs when a foreign company invests to manufacture similar goods and/or services for the local/regional market. For example, Toyota set up a car manufacturing plant in India to produce and sell its vehicles locally.
- Vertical FDI
This occurs when a foreign investor invests to provide inputs or services to the nation’s existing operations. For example, Samsung invested in display manufacturing units to source screens for its mobile phones produced in India.
- Conglomerate FDI
This type of FDI occurs when a company invests in unrelated business sectors in a foreign country. For example, Tata Group acquired Tetley Tea and Corus Steel, diversifying into unrelated sectors like FMCG and steel.
- Platform FDI
It involves using India as a base for exports to foreign markets. A manufacturer of electronic components establishes a factory in India not only to serve the local market but also to export commodities to other countries. This makes India a ‘platform’ for the company’s exports. For example, Apple started assembling iPhones in India not just for the domestic market but also to export to Europe, the Middle East and Africa.
Foreign Direct Investment Advantages And Disadvantages
The primary advantage of FDI is that it boosts economic expansion in the host nation. FDI results in substantial capital inflows, employment, skills, technology, and expertise, all of which accelerate industrial development and boost productivity/output.
The primary disadvantage of FDI is the risk of excessive reliance on foreign capital. When a country relies excessively on FDI to fuel its economic growth, it loses some degree of policy independence and self-sufficiency. In addition to making the economy vulnerable to external shocks such as global recessions, a high proportion of foreign ownership in critical industries can make the economy more susceptible to such shocks.
Difference Between Foreign Direct Investment And Foreign Portfolio Investment
The primary differences between Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI) are ownership and control. With FDI, the foreign investor acquires a substantial ownership stake (typically 10% or more) in the local company/assets, thereby gaining direct control and management rights over the operations. FPI, on the other hand, involves only minor ownership of stocks/bonds without investor control.
|Parameters||Foreign Direct Investment||Foreign Portfolio Investment|
|Nature of Investment||Involves direct ownership of assets like plants, equipment or shares of a company||Involves indirect ownership through investments in stocks and bonds|
|Investment Horizon||Long term in nature aimed at gaining strategic advantage||Short term in nature focused only on financial gains|
|Capital Utilization||Capital is invested in real and productive assets||Capital is invested in financial instruments for returns|
|Impact||Brings technology transfer, skills and jobs||Does not directly create local employment|
We hope that you are clear about the topic. But there is more to learn and explore when it comes to the stock market, commodity and hence we bring you the important topics and areas that you should know:
What Is FDI Meaning – Quick Summary
- FDI stands for Foreign Direct Investment
- FDI is when companies invest in business activities in foreign countries by building factories, acquiring companies, etc.
- The main objective of FDI is economic development.
- The four types of FDI are Horizontal FDI, Vertical FDI, Conglomerate FDI and Platform FDI.
- The primary advantage of FDI is that it boosts economic expansion.
- The primary disadvantage of FDI is the risk of excessive reliance.
- The primary difference between FDI and FPI is ownership and control.
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What Is The Full Form Of FDI – FAQs
What does FDI mean?
FDI stands for Foreign Direct Investment, which is a cross-border investment category where an investor resident in one economy establishes a lasting interest in another economy.
What are the types of FDI?
The four types of FDI are:
- Horizontal FDI
- Vertical FDI
- Conglomerate FDI
- Platform FDI
Who are the 5 largest investors of FDI?
The 5 largest investors of FDI in India are:
What are the two modes of FDI?
The two modes of FDI are the automatic route and the approval route. In the automatic route, FDI is permitted in most sectors without prior government approval, up to certain limits. Investments are only required mandatory post-facto intimation to the RBI. In the approval route, FDI in restricted sectors requires government approval either from the FIPB or the relevant ministry. Detailed applications and scrutiny are involved to ensure compliance and national interest.
What is the FDI limit in India?
FDI limit in India varies depending on the sector and type of investment. Typically, these include:
- Up to 100% FDI permissible (includes manufacturing, construction, and information technology)
- Up to 74% FDI permissible (pharmaceuticals and defence)
- Up to 49% FDI permissible (air transport services and private sector banking included)
- Up to 26% of FDI is permissible (print media).
Who controls FDI in India?
The Department for Promotion of Industry and Internal Trade (DPIIT), under the Ministry of Commerce & Industry, Government of India is responsible for the formulation and implementation of FDI policy.
Who introduced FDI in India?
The Indian government introduced FDI reforms in 1991 under then-Finance Minister Dr Manmohan Singh as part of a broader economic liberalization and globalization project initiated in response to an economic crisis. His proposals laid the groundwork for easing restrictive controls and allowing greater foreign investment in key sectors, which played a significant role in India’s subsequent economic growth..
Which sector allows 100% FDI?
|Sector Allowing 100% FDI|
|Agricultural and Animal Husbandry|
|Mining and Exploration of metal and non-metal ores|
|Mining (Coal and lignite)|
|Petroleum and Natural Gas|
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