Foreign Direct Investment

Foreign Direct Investment is a term used to describe the investment of resources by companies domiciled outside a country, into foreign entities and markets. These investments can be in the entrepreneurs’ country, in combination with overseas subsidiaries or wholly-owned subsidiaries. This is primarily used when a company invests resources in some other country, where it is mainly aimed at the acquisition of patents, licenses and other knowledge that could help them stay ahead in the market. However, this is not always the case as some countries have different policies concerning foreign direct investments but that does not mean that it should be ignored.

What is Foreign Direct Investment?

Foreign Direct Investment meaning is the financial investment in foreign companies that are not subsidiaries. The money invested in FDIs, unlike portfolio investments, is used to run and support the company, rather than being held as an asset until a better opportunity arises. Foreign direct investment examples include a foreign company building a new plant overseas.

Although, the term Foreign Direct Investment (FDI) is widely used; it has been replaced by the term “global direct investment,” or “global investments” in some instances. Lately, the terms foreign direct investment (FDI) and international direct investment have gained more acceptance from academics.

Types of FDI:

FDI can be classified into 4 categories are:

Horizontal FDI: In horizontal FDI, a company enters into an agreement with other companies in the same industry to form a joint venture. The purpose of this type of FDI is to help spread the risks, reduce costs and enhance products and services.

Vertical FDI: This type of investment is between 2 companies that are in different stages of the value chain. For example, the firm that sells the raw material and another that produces a finished good from it.

Conglomerate FDI: In this type of investment, a company makes a financial investment in another company that is successful in maintaining or increasing its market share and profitability. The main purpose of this type of FDI is to increase corporate profits.

Apart from the above-discussed types of FDI which only concern the investors and their economic benefits, different government agencies also monitor the effect foreign direct investment has on global economies. FDI, being one of the most important forms of global economic integration, should also be monitored by various international organizations.

Platform FDI: This type of investment is between two companies that are directly linked. For example, 2 different banks may form a joint venture to provide services between them.

Cross border FDI: This type of FDI involves the transfer of funds from one country to another. While this method is considered to be ‘dirty’, it keeps prices competitive and acts as an exchange mechanism.

FDI’s financial benefits are very important, mainly because they can help expand the economies of new countries and allow investors in those countries to earn profits without having to worry about production costs. When FDIs are done well, they pave way for the economic growth and future economic stability in countries with high potential on a global scale.

What is the Importance of FDI?

Foreign direct investments play a very important role in the success of globalisation. Foreign direct investment in India is the single largest foreign investment received by any Asian country. Major sectors that attract FDI are -health care, information technology and automobiles. In India, automotive is a relatively new and expensive sector so the exports of automobiles make up a very small proportion of its trade balance but domestic production still needs a lot of capital investment since it poses various technical challenges. Therefore, India has to depend on traditional sources of finance such as FDIs to fund new technology developments not possible through domestic debt or bank loans.

What are the Advantages of FDI:

• Integration of economies: FDI helps better integration of economies since multinational businesses have the ability to spread their operations around multiple countries
• Higher revenues, exports and employment:
• Technology transfer: The exchange of technology is one of the most important benefits of foreign direct investment
• Capital and resource transfer: With FDI, capital and resources are transferred from the home country to the foreign one, this helps in creating a new supply for resources, as well as adding value to existing ones
• Providing a market for the goods produced by firms in the home country: Most usually, FDI firms produce goods that can be used by people in their native country and elsewhere

What are the Disadvantages of FDI?

• Political instability: FDI usually accompanies political instability due to the massive increase in employment and cost of living caused by it
• Erosion of local market share: FDI’s expansion has a drastic effect on the local market of a country as it causes consumers in other parts of the world to switch from using local products to using those from the home country, which results in erosion of their own markets
• Competition between labour and capital migrants: The influx of labour from other countries is usually looked down upon because it is seen that these people are willing to accept lower salaries for inferior jobs that require fewer skills

Conclusion

Foreign Direct Investment is one of the most significant things that has happened to the global economy in recent times. Its advantages, disadvantages and how governments look at it should all be taken into consideration before making any serious decisions about whether or not the foreign direct investment is a good thing for certain industries, local economies or entire countries. Foreign Direct Investment in India will only continue to grow in the years to come, so it’s important that countries like India understand the ways that FDI can benefit their growth and progress.