What is FDI (Foreign Direct Investment)

Foreign Direct Investment

When the investor of the project stays outside the national boundary of the country where such project exists, the investment surely adds on to be the Foreign Direct Investment for the country and the project where such investments are done. FDI or Foreign Direct Investment, quite literally, is the investment made by any organization or any individual in some business initiative of some other country.

What is FDI (Foreign Direct Investment)?

Foreign Direct Investment or FDI is an investment by any foreign organization or individual in the form of full or partial control of ownership in a business venture of any country. This feature of gaining direct control over the functioning of the investment-seeking organization differentiates Foreign Direct Investments from Foreign Portfolio Investments. In the case of Foreign Portfolio investments, only money is invested without gaining control over the functioning of the organization.

Any organization or any individual willing to invest in a country’s economy, after a detailed analysis of the prospects of growth and opportunity can plan to invest in such business and proposition even if they are not the residents of the country using the channel of Foreign Direct Investment.

This would help the investing organization or individual in terms of growth and high returns churned in from such growth and development in the business segment in that particular country. Such investments often serve heavy financial benefits for the investing organization or individuals. The organization where such investments are done gain in terms of huge investments and funds required to operate such venture. Even the country where such investments are being funded gains in terms of the flow of foreign exchange reserves, thus benefiting the global economic position of the country among other economies.

FDI Advantages and Disadvantages

Any investment comes with its own set of pros and cons. Before investing, therefore, the investor needs to conduct a thorough analysis of such investment route to understand the flip sides of such investments and the expected gains from the investments. The basic advantages and disadvantages associated with Foreign Direct Investments include:

  • FDI stimulates growth in the economy of the country where such investments are one. This further benefits the local industry in which such investments are done apart from benefiting the entire ecosystem of business, thereby nurturing a positive growth atmosphere.
  • FDI eases the international sales and trade barriers existing within nations and economies, thus ensuring a free flow of goods and services among all the economies.
  • FDI gives a boost to the economy by adding money to the economy. It also helps the economy by creating more jobs which in turn adds on to the economic value of the country and the industry.
  • FDI further leads to developing and enhancing the human capital resources of the country, especially the industry which attracts such investments. The development of human capital resources of the sector and the economy, though understated and undervalued, plays a vital role in sustaining long-term growth and prosperity for both the industry in specific and the economy at large.
  • FDI increases the income of the country where investments are done but also hinders the domestic economy of the home country of the investor.
  • FDI affects the interest rates of two foreign currencies where one currency gains at the cost of other currency.
  • FDI always faces huge risks from the dynamic business environment of the country where investments are done, especially the risk associated with political changes.

Foreign Direct Investment in India

Foreign Direct Investments or FDIs have a direct impact on the growth of the Indian Economy. FDI is one of the major sources of money supply into the Indian Economy. The investing companies reap profits by investing in fast-growing business segments of India which features cheaper wage, easy availability of skilled labors, and the dynamic business environment of India. FDI attracted by Indian economy has been ranked among the top ten investment destinations across the world.

Types of Foreign Direct Investment

The various type of Foreign Direct Investment includes:

  • 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 in 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 e.g., car manufacture in Australia invests in a car manufacturing company in India.

  • Vertical FDI: The industry of the investor and the company where investments are done are related to each other. This type of FDI is further classified as:

    • Forward Vertical FDI: In such investments, foreign investments are done in organizations which can take the products forward towards the customers. For e.g., a car manufacturing company in Australia invests in a wholesale Car Dealer company in India.

    • Backward Vertical FDI: In such investments, foreign investments are done in an organization which is involved in the sourcing of products for the particular industry. For e.g., the car manufacturer in Australia invests in a tire manufacturing plant in India.

  • Conglomerate FDI: Such investments are done to gain control in unrelated business segments and industries in a foreign land. For e.g., the car manufacturer in Australia invests in a consumer durable good manufacturer in India. Here the investing company ideally manages two challenges, first being gaining operational control in a foreign land, and the second being starting operations in a new industry segment.

  • Greenfield Entry: In this special type of FDI, the investing company refers to an investing organization starting assembling from scratch just like Honda did in the United Kingdom

  • Foreign Takeover: This type of FDI takes the form of a foreign merger, acquisition or takeover of an existing foreign company.

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