Foreign investment

Foreign investment is an integral part of every economy. It involves the process through which capital flows from one country to another. Through foreign investment, foreign investors get extensive ownership stakes in domestic companies. 

Foreign investment means that foreigners have an active role in the management when they invest in companies. This is part of their role when they have a substantial investment or equity stake. When they have a significant investment, they can influence business strategies. 

Countries across the globe follow the process of globalisation, which aims at bringing nations together. An essential part of globalisation is foreign direct investment. Through this, multinational companies have investments in several countries across the world. 

In this article, you will learn and understand foreign direct investment. Additionally, you will also learn about the types of FDI and FDI in the insurance sector. Lastly, you will also learn and understand the importance of FDI. 

What Is Foreign Direct Investment? 

Foreign Direct Investment is an investment that an individual or company makes in a company based in another country. This is how many companies expand their business from their home country to other countries. Foreign investment is when the investing company has direct control over the company that they are investing in. It’s not a process that is limited to just transferring monetary funds as an investment. 

Foreign Direct Investment helps in the economic growth of the economy. Additionally, it also helps create more job opportunities, introduce new technology, and improve the infrastructure. 

Ways Of Foreign Direct Investment

There are several ways in which foreign investors can invest in other companies in countries. Investors expand their business in other companies. 

Additionally, they have voting rights in the businesses they have invested in monetary terms. Here are the ways that investors can enter a foreign market through foreign direct investment: 

• Mergers and acquisitions 
• Joint ventures with overseas firms 
• Subsidiaries for a domestic firm in another country 
• Getting voting rights in a business based in another country 

Types of Foreign Direct Investment 

There are mainly two types of FDI: horizontal FDI and Vertical FDI. Additionally, there are two more foreign investments- conglomerate and platform FDI. 

Horizontal FDI: When a business expands its operations into a foreign country, it’s called Horizontal FDI. It means that the company conducts the same activities in another country too. An example is a food supply chain that opens restaurants in other countries of the world. 

Vertical FDI: When a business expands in a foreign country by shifting to a different level of the supply chain. In Vertical FDI, the company operates various activities in other countries. Additionally, even if the activities are different, they are still related to the company’s main business. An example is if a food chain bought a farm to produce its raw materials. These raw materials will be essential for the primary good of the company. 

Conglomerate FDI: This kind of FDI is when a company acquires an unrelated business in another country. It’s an FDI that doesn’t frequently happen because of two barriers. Firstly, entering a new country and secondly, entering a new market. An example of this is when a phone company from one country acquires a clothes company in a foreign country. 

Platform FDI: The last kind of FDU is Platform FDI. This one when a company expands to another country. However, the company’s output from the second country goes to the third country. The platform FDI is otherwise known as export-platform. It happens in low-cost locations which have free-trade areas. An example would be if a company bought a manufacturing plant in another country to export the goods to a third country. 

FDI In Insurance Sector 

The Indian government has brought new rules regarding FDI in the insurance sector. They amended the Indian Insurance Companies Rules, 2015. According to the new regulations, the FDI in the insurance sector will increase the limit from 49% to 74%. 

This rule will increase the presence of foreign individuals and companies in the insurance sector of the economy. Every insurance company has to follow this rule made by the Government of India. 

This new rule aims to increase foreign direct investment in the economy. This will help the local insurers to grow fast and expand their businesses in India. Additionally, India is a country that has the lowest insurance penetration levels among all the countries across the globe. 

Importance Of Foreign Direct Investment

Foreign investments are an essential part of developing and emerging markets. Many of these companies need multinational funding and expertise, which is necessary to expand their international sales. 

Countries use these investments to improve the infrastructure of the country. FDI helps in creating job opportunities and improving the technology of the country.  A way in which countries encourage FDI is through trade agreements.