Foreign Direct Investment Meaning

 Foreign direct investment notes

FDI notes for UGC net:

Foreign direct investment is the investment made in production or business by the country in another country by either means of buying a company or expanding its  business in a foreign country  

                                                            

FDI was introduced in the year 1991 under Foreign Exchange Management Act (FEMA), by then finance minister Dr. Manmohan Singh. It started with a baseline of $1 billion in 1990. India is considered a second important destination for foreign investment. The major sectors that attracted FDI are services, telecommunication, construction activities, and computer software and hardware.

Type of FDI

1. Horizontal FDI:- horizontal FDI arises when a firm duplicates it's home country-based activities at the same value chain stage in a host country through FDI. For example, Toyota assembles motor cars in Japan and the UK.

2. Vertical FDI:- takes place when a firm through FDI moves upstream or downstream in different value chains. when firms perform value-adding activities stage by stage in a vertical fashion in a host country. For example, Maruti selling cars in the home country and electronics in China.

3. Platform FDI:- Foreign direct investment from a source country into a destination country for the purpose of exporting to a third country. For example, if BMW purchased manufacturing plants in Ireland with the primary purpose of exporting cars to other countries in the EU.

4. Inward FDI:- an inward investment involves a foreign entity either investing in or purchasing the goods of a local company

5. Outward FDI:- an outward investment is a business strategy where a domestic firm expands its operations to a foreign country either via acquisition or expansion of an existing foreign facility.

6. Greenfield investment:- Greenfield investment is the investment in a manufacturing, office, etc. it is the idea of building a facility on a greenfield such as farmland or forest.

7. Merger and Acquisition:-  the merger is a combination of two companies to form a new company, while an acquisition is the purchase of one company by another company in which a new company is formed.           

     For example: Google and android

Benefit of FDI

1. Improve the foreign exchange position of the country.

2. Employment generation and an increase in production.

3. Help in capital formation by bringing fresh capital.

4. Helps in the transfer of new technologies and management skills.

5. Helps in increasing exports.

6. Increase in tax revenue.

Disadvantages of FDI

1.    Domestic companies fear that they may lose their ownership.

2.    Small companies fear that they may not be able to complete with world-class large companies.

3.    Foreign companies invest more in machinery and intellectual-property than in wages of the local people.

4.    The government has less control over the functioning of such companies as they usually work as a wholly-owned subsidiary of an overseas company.

Procedure for receiving FDI in India

Automatic route:-

 FDI is allowed under the automatic route without prior approval either of the government or the reserve bank of India in all activity/sectors as specified in the consolidated FDI policy, issued by government of India from time to time.

Government Route:-

 FDI in activities not covered under the automatic route requires prior approval of the government which are considered by the foreign investment promotion board department of economic affairs Ministry of finance.

METHODS OF FDI

The foreign direct investor may acquire voting power of an enterprise in an economy through any of the following methods:

1.     By incorporating a wholly-owned subsidiary or company anywhere

2.     By acquiring shares in an associated enterprise

3.     Through a merger or an acquisition of an unrelated enterprise

4.     Participating in an equity joint venture with another investor or enterprise