Foreign Direct Investments (FDI) in India - What Is It, Types, Examples, & Benefits
During 1980-91, the Indian government began liberalizing FDI with the Industrial Policy Statements of 1980 and 1982. In the second quarter of FY 2022, the total FDI inflow in the country is $16.6 Bn.
There is considerable daily news about the FDI and the impact it fetches. So, it's time to understand Foreign Direct Investments in detail and comprehend the daily news.
This blog will explore foreign direct investment, its meaning & the impact of foreign direct investment in India.
What is the foreign direct investment?
An investment made by any entity directly in foreign countries is known as a foreign direct investment. Foreign Direct Investment is one of the methods of investing between countries.
Foreign Direct Investment also works as an indicator of the socioeconomic, cultural & political environment of the country. Foreign direct investment brings money to the country from foreign investors that boost business, employment, and government earnings.
Control & Equity
An investment is considered FDI when an investor obtains at least 10% of the voting power in a company. Control is the crucial element of FDI, which shows the intent of active management participation & influence over the operation of the company.
FDI can be 'organic' or 'inorganic'. Organic investments provide funds for growth and expansion in well-doing business. The inorganic investment brings funds with investors intent to buy the business in the country.
Businesses in poor financial health get a boost from FDI in emerging economies. A non-debt financial resource is foreign direct investment. It has the ability to play a significant role in stimulating economic growth.
Why is FDI growing worldwide?
Globalization and internationalization is the primary reason why FDI is emerging across countries, along with the following reasons;
- It allows business influence & control in the foreign land.
- FDI helps to beat the problem of monopoly in any country in various sectors, where monopoly means the dominance of one company in a sector.
- FDI brings the external edge for economies & businesses to grow at hard times.
- It also helps investors grow their money and hedge against the downfall of one country. For example, if India sees a downfall in the economy, investors may invest in the US markets to gain from there.
- Businesses can expose a broader market by going outside their boundaries to serve a large set of audiences with their services or goods.
How FDIs come to India?
The are various ways of entering the Indian market in terms of a business perspective, but when it comes to following a certain set of rules and procedures, it is the government that decides which sectors can enter freely and which ones have to take prior approval.
Every country has its own principles, rules, and regulations to monitor their economy, and so does India. There are mainly two routes to enter Inda:
There are certain industries that are allowed by the Indian government for foreign businesses to enter the country and start doing business without any prior approval from the government itself.
There are also a particular set of industries and businesses in which a strict provision has been levied before starting a business in such a sector in India. An NRI has to submit the required form online in the foreign investment facility portal to get clearance. The application will be transferred to the corresponding ministry, and the authority will declare the result in a while.
Basically, the government cannot allow those businesses to be run in India by foreign individuals where there is a threat to the domestic industry or stakeholders of the country or due to which there is a possibility of leakage of information from a domestic country to a foreign country.
There is also business that is addictive in nature and is prohibited by the government for FDIs. Some prohibited businesses are as follows:
- Chit fund business
- Gambling, lotteries, betting businesses.
- TDR trading
- Agricultural and plantation activities (excluding animal husbandry, fisheries, tea plantations, horticulture, and pisciculture)
- Atomic Energy Generation
- Products manufactured by the tobacco industry, such as cigarettes and cigars
- Real estate and housing (excluding townships and commercial projects
Types of FDIs
Every company works as per the activities written under their memorandum of association, and companies collaborate according to their line of business. Some companies do business in a foreign country that is directly related to their business, some are indirectly related, and others are unrelated.
Here are four major types of FDIs enter India to do business related or unrelated to their original businesses:
Every company has a supply chain for procurement and making their product available to their end customers. When a company enters a foreign country to strengthen its supply chain activities or a part of its supply chain activities, such an FDI is known as a vertical FDI business.
When a company is directly looking forward to expanding its core business activities in a foreign country to serve a larger set audience, then such a business is known as a horizontal FDI business.
When a company enters a foreign country to do business unrelated to its original business's core operation, such an FDI is known as a conglomerate FDI business. The basic idea of starting such a business in another country is to utilize the best resources available in that country and expand the company's sub-niches of the holding company.
In this type of FDI, companies enter foreign countries to expand their existence across borders. The manufacturing unit will still be in the home country, but the product will be assembled in a foreign country. This form of business is common these days. The company will export every manufactured product from home to foreign countries. The countries do not much appreciate such type of FDI.
Advantages of being FDI in a country
Diversification of businesses
Businesses diversify their business portfolio, which helps them in earning much more returns and brand value.
Variety of products
By entering FDI in India, we will get access to a variety of products in the country with competitive prices. It reduces the risk of monopoly in pricing.
It also helps introduce new technology in the home country, the technology that they are using, which might be new to us, and we will also be able to use such technology.
When an FDI enters the economy, it helps increase employment opportunities and foreign funds in the country's balance sheet. Economic growth is a vital benefit of joining an FDI in the country.
Disadvantages of FDI
Local business disruption
FDI might become a threat to domestic businesses. Due to the technology and availability of heavy capital investment in the hands of foreign companies, they can sell their products or services at much lesser prices than domestic companies. It leads to the demotivation of domestic businesses to do businesses.
There will always be a threat to the Indian economy that income earned in India will not be spent in India. It will be sent back to the home country from where an FDI came.