Foreign Direct Investment Meaning
Foreign direct investment (FDI) is a type of controlling ownership in a business entity in another country. It is differentiated from the Foreign Portfolio Investment by the notion of direct control.
FDI is an investment that is either inorganically by buying a company in a foreign country or expanding the operation of an existing business in another country. Example: Amazon Expanding its business in India, as Amazon is a US firm.
Also, FDI also includes mergers and acquisitions, constructing new facilities, intra-company loans, etc.
FDI is basically defined as constructing a new facility and having 10% or more voting stock in a company in economy, other than the investor in a foreign country.
FDI = Equity Capital + Long Term Capital + Short Term Capital
Foreign direct investment is involved in the participation in management, joint venture, transfer of technology, etc.
Foreign Direct Investment in India
FDI is one of the major monetary sources of development for India. The foreign player, investors, etc invest in growing private organizations. They also invest due to cheap labor and potentially high growth of the Indian economy.
The Foreign Direct Investment in India steadily increased since the economic liberalization after facing an economic crisis in 1991. Due to that, more than one crore direct and indirect jobs were generated.
Post Covid 19
To protect the Indian companies from the acquisition of foreign players, India changed its FDI policy post-Covid-19. As per the Department for Promotion of Industry and Internal Trade, there is no restriction on the FDI but now they will be scrutinized by the Ministry of Commerce and Industry, to protect the Indian companies.
Types of Foreign Direct Investment
There are four types of FDI, they are Horizontal, Vertical, Conglomerate, and Platform FDI.
In this FDI, an entity expands its operation in another country.
In this FDI, the entity expands into another county by moving to a different level of the supply chain. That is the companies do different activities in the foreign countries but these works are related to their main business.
Ex: Monisha which is making Phones in the USA which is its main business but it develops its Software in India.
In this FDI, a company is doing business in a foreign country that is completely unrelated to its main business in its own country. This type of FDI is uncommon.
Example: Revathi Makes TVs in the USA but it is making Ice Cream in India.
In this FDI, a business entity expands its operation into another country and its output is then exported to a third country.
Example: Sameksha is a Korean company, that makes cars in India and exports them to the USA.
Routes of Foreign Direct Investment
There are two routes of FDI’s in India. One is the Automatic route and the other is the Government route.
In this route, FDI is allowed without the approval of RBI and the government of India.
In this route, FDI is allowed after prior approval by the government and RBI. This application is processed by Foreign Investment Facilitation Portal.