- Foreign direct investment (FDI) is an investment made by a company or individual belonging to one country in another country, in the form of either establishing business operations or acquiring business assets in the other country, such as ownership rights or controlling rights/powers in a foreign company. Foreign direct investments are distinguished from portfolio investments in which an investor merely purchases equities of foreign-based companies, which does not give rise to controlling rights or powers. The key feature of foreign direct investment is that it is an investment made that establishes effective control of, or at least substantial influence over, the decision-making of a foreign business.
Types of FDI:
- Horizontal − In case of horizontal FDI, the company does all the same activities abroad as at home.
- Vertical − In vertical assignments, different types of activities are carried out abroad.
- Conglomerate − In this type of investment, the investment is made to acquire an unrelated business abroad.
Need for FDI:
In the last two decades world has seen an extensive inflow of FDI or foreign direct investment into developing countries. Restrictions which were earlier in place on these investments are now being removed as the importance of FDI is being realized. FDI has a major role to play in India’s economic development. The following are the major needs and significance of FDI for any developing nation like India.
- FDI acts as a long term source of capital for the country that is able to attract investment from foreign nationals.
- Advanced and developed technologies are made available to the developing countries which lack these developments due to shortage of resources and capital. In addition to that it also facilitates exchange and improvement of technological know-how.
- Improvement in quality of goods and services is observed as one of the most significant and evident need of FDI. It increases the efficiency of production along with improving the quality of goods manufactured.
- Best global practices of management. The investors bring with them several world-class management techniques and makes them available to the local market.
- Exploitation of Natural Resources: The developing and underdeveloped countries possess a plethora of natural resources which they cannot utilise due to lack of technological know-how. Foreign investments overcome this setback by providing technology and capital to these nations to exploit use these resources.
- Reducing the Foreign exchange gap.
- As large amount of capital comes in through these investments more and more industries are set up. This helps in increasing employment. The employment generation is observed in both skilled as well as unskilled sector.
- Infrastructural growth and development of basic economic infrastructure.
Components of FDI:
- Foreign Private Investments: Under this a corporate house establishes its subsidiary or branch in the host country or undertakes merger, acquisition or takeover through various means. These are called Multi-National Organisations. These organisations have set up a large number of branches and subsidiaries in the developing countries benefitting both the parent and the home country along with giving the organisation several advantages. This was about direct investment. Foreign investment makes way through indirect investment as well wherein national of a particular country purchases share and debentures floated by the industries of some other country.
- Foreign Aids: It is the international transfer of capital, goods, or services from a country or international organization for the benefit of the recipient country or its population. Aid can be economic, military, or emergency humanitarian (e.g., aid given following natural disasters). Foreign aid can involve a transfer of financial resources or commodities. Countries often provide foreign aid to enhance their own security. Thus, economic assistance may be used to prevent friendly governments from falling under the influence of unfriendly ones or as payment for the right to establish or use military bases on foreign soil. Foreign aid also may be used to achieve a country’s diplomatic goals, enabling it to gain diplomatic recognition, to garner support for its positions in international organizations, or to increase its diplomats’ access to foreign officials.