Foreign Direct Investment (FDI) is when an individual or a corporation from one country, capitalizes in another country. If the investment is in foreign companies’ assets then the definition differs. According to the IMF, foreign direct investment is when the stakeholder holds more than a 10% stake in the company. When the stock amount is so small that it cannot affect the control of a firm i.e. less than 10%, then the amount is referred to as only a part of the “stock portfolio”.
Types of Foreign Direct Investment
1. Horizontal Foreign Direct Investment:
When an invests is made in an industry located in other Nations that deals in the production of similar goods, it is regarded as Horizontal FDI.
2. Vertical Foreign Direct Investment:
- When the investment is made into an organization that is not directly in the identical industry but within the supply chain.
- Vertical FDI can be backward vertical integration or forward vertical integration.
- Backward Vertical Integration is when the investment is made into the company that supplies or can potentially supply raw material.
- Forward Vertical Integration is when the investment is made to the industry where they can sell their final product.
3. Conglomerate Foreign Direct Investment:
When the investment is made in a business which is not at all related to the person or company investing.
How Overseas Companies Can Set-up Their Business Operations in India?
1. Incorporating the Company in Companies Act, 1956
- A wholly-owned subsidiary
- Joint venture company – an existing company or new company with a domestic partner
2. Without Incorporating in the Companies Act, 1956 – as an Unincorporated Entity
- Liaison Office: The liaison office act as a channel for communication between the parent company and companies in India. It promotes import, export, and financial and technical collaborations between the parent/head companies in abroad and companies in India.
- Project Office: The project offices are established so that the foreign company can execute their projects in India.
- Branch Office: The branch office is engaged in the import and export of goods, providing consultancy services, act as a buying and selling agent in India, provides IT and software services in India, and giving technical support in the supply of products by the parent company.
The Legality of Foreign Direct Investment In India
- Within business collaboration
- Throughout joint endeavors and technical collaboration
- Within investment markets
- Within private assignments or favored allocations
Major Areas for Foreign Direct Investment in India
- Automobile industry
- Medicines and drugs
- Railways structure
Sectors Where Foreign Direct Investment Is Not Legalised in India
- Atomic Energy
- Railway Transport
- Coal and lignite
- Cultivation and husbandry
- Housing and Real Estate business
Major MNC’s Under Foreign Direct Investment in India
- Ford Motors
- Skoda Motors
Advantages of Foreign Direct Investment
- FDI encourages global business as it allows production to flow to parts of the world which are more cost-effective.
- Nations rely on each other for a successfully functional trade- supply of goods and providing a marketplace to sell goods. Thus, every party safeguards the firmness of its trading counterparts or associates. This interdependence enables the brotherhood feeling among nations.
- When people belong to different backgrounds and cultures come together, their knowledge is shared amongst all thus the work is done with efficiency and with a broad outlook.
- When a business invests in a foreign market, the risk is reduced as now it doesn’t rely on a single market. If the demand is reduced in one, there may be growth in others.
Disadvantages of Foreign Direct Investment
- The labor and the raw material is cheaper in developing nations such as Myanmar, Syria pr Tunisia than developed nations such as the USA. Thus there is a possibility that developed nations buy a large sum in the developing nations and but that creating a situation of foreign control. To prevent this, nations do impose some restrictions on FDI to ensure domestic control prevails.
- Investing in other nations though increases jobs in foreign countries but it reduces employment in its lands.
- It is always a possibility of regional war and in case of government changes, there is no surety as to the new government’s favorability towards the investors. The risk is more with developing nations such as Africa and other Asian countries.