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HomeLearnEconomyForeign Direct investment (FDI)

Foreign Direct investment (FDI)

Foreign Direct investment (FDI)

Foreign Direct investment (FDI) is a direct investment into production or business in a country by an individual or company of another country, either by buying a company in the target country or by expanding operations of an existing business in that country. Foreign direct investment is in contrast to portfolio investment which is a passive investment in the securities of another country such as stocks and bonds.

The Foreign Direct Investment means “cross-border investment made by a resident in one economy in an enterprise in another economy, with the objective of establishing a lasting interest in the investee economy.

FDI works at the international and national levels through its own activities and those of its members. FDI is in official relations with the World Health Organization (WHO) and a member of the World Health Professionals Alliance (WHPA).

Read Also: Deen Dayal Upadhyaya Grameen Kausalya Yojna (DDU-GKY)

India is the 3rd largest economy in the world in terms of purchasing power parity and thus looks attractive to the world for FDI. Even Government of India has been trying hard to do away with the FDI caps for the majority of the sectors, but there are still critical areas like retailing and insurance where there is a lot of opposition from Indian companies. Some of the major economic sectors where India can attract investment are Telecommunications, Apparels, Information Technology, Pharma, Auto parts, Jewelry, Chemicals.

Benefits of FDI

  • Improves forex position of the country;
  • Employment generation and increase in production;
  • Help in capital formation by bringing fresh capital;
  • Helps in transfer of new technologies, management skills, intellectual property
  • Increases competition within the local market and this brings higher efficiencies
  • Help in increasing exports;
  • Increases tax revenues

Types of FDI

  • Horizontal FDI arises when a firm duplicates its home country-based activities at the same value chain stage in a host country through FDI.
  • Platform FDI from a source country into a destination country for the purpose of exporting to a third country.
  • Vertical FDI takes place when a firm through FDI moves upstream or downstream in different value chains i.e., when firms perform value-adding activities stage by stage in a vertical fashion in a host country.

Foreign investment was introduced in 1991 under Foreign Exchange Management Act (FEMA), driven by then finance minister Manmohan Singh. As Singh subsequently became the prime minister, this has been one of his top political problems, even in the current times. India disallowed overseas corporate bodies (OCB) to invest in India. India imposes the cap on equity holding by foreign investors in various sectors, current FDI limit in the aviation sector is maximum 49%.

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