FDI- A curse or boon for the economy?
- People generally get confused when talking about FDI and how it will affect your country.
- Will it help in better job opportunities, will it help in improving the cities lifestyle and so much more?
- What many fail to understand is its true purpose of serving any nation.
- Check out our complete brief as we spill the deets about all tactics involved with the well-known terminology- "Foreign Direct Investment".
What Is FDI?
- The textbook definition for FDI is- An investment straight into production in a business by a company located internationally.
- A cross border investment where foreign assets are invested in the domestic market companies that excludes stock investment.
- In layman's terms- FDI is either done to bring the new brand into the domestic market or upgrade the already existing organisations to the latest one with massive fundings.
Types Of FDI
- Now, generally, an investment is a big deal when it comes to various market development, and there are certain categories in which it's implemented.
- Let's learn a generic brief on the 3 types of foreign direct investment?
1. Horizontal FDI
- Horizontal FDI is where funds are invested overseas in the same or similar business.
- In general terms, business finances in a foreign brand that designs similar products.
- For example, Loreal, a US-based giant, may purchase Avene, a France based skincare company.
- They are both in the industry of cosmetics, and, hence would be classified as a form of horizontal FDI.
2. Vertical FDI
- Vertical FDI is when investments are made inside the supply circles, but not right in the likewise trade.
- In other terms, when any company invests in an international firm that it may provide or sell to.
- For example, Nestle, a Swiss chocolate manufacturing giant, might look up to invest with cocoa producers in Ghana, Africa.
- It can be best described as vertical integration because the company is acquiring from a supplier or a future producer, in the accumulation train.
- Then again, we also have forward vertical integration.
- In this method, the company invests in an international organisation that's farther adjacent to the stock chain.
- For example, Nestle can search upon to purchase a share in Amazon, where it can sell its in-house products with customised rates.
3. Conglomerate FDI
- A gigantic and generally a long term investment plan that doesn't require involvement in the same or similar industry at all.
- This method of investment offers the company substantial funding in order to increase their business and expand their branches on a global level.
- For example, Walmart, a US retail chain might easily invest in Bajaj, an Indian automobile and electronics manufacturing giant.
Percentage Credits: LinkedIn Slideshare; Category- Business
Advantages of FDI
There are numerous advantages of implementing FDI in India like-
- No debt creation from the Governments' part.
- Easier technology transfer.
- Promotes exports, and international branding.
- Decrease of international and regional forces.
- Builds a healthy competition and boosts productivity.
- Access to better and advanced resources.
- Help in mass production and introduction circulation.
- Exchange of knowledge, traditions, and technology.
- Cheaper cost and efficient production.
- Increases the value of manufacturing.
- Constitutes India’s 50% GDP growth rate.
- More choices and diversification amongst industries.
- Better tax revenues.
- Growth of telecom sector
Does India Need FDI?
- It might have been a debatable argument in the past but seeing the growth of the country, the government and Indian conglomerates welcome Foreign investments with open arms.
- Currently, FDI in India is permitted via direct financial collaborations, technical support, and joint ventures.
What Investments Are Exempted From FDI?
- Although, many industrial giants and markets are benefiting greatly there are certain sectors that aren't permitted to avail FDI in India like Cigarettes manufacturing, Defence Industry, Atomic minerals & energy, gambling, private investments, lottery business, plantations, and Mining.
Disadvantages in India for FDI
- Replacement of human labor leading to loss of jobs.
- Risk due to political, sovereign, commercial, and terrorism issues.
- Destruction of traditional retail markets.
- International control over domestic projects and ideas. Needs highly educated and skilled professionals.
- FDI will help get access to better technology, resources, funding, and many more that will ultimately help in the development of the Indian economy.
- Even though every industry will have a certain target, process, and manufacturing style, the fact that it will enhance a lot of industries' technology cannot be overlooked.
- Along with that, the government gets to build long term business relations for a brighter future.
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Q- What are the 4 types of foreign direct investment?
Ans- The 4 types of FDI or foreign direct investment are-
- Horizontal FDI.
- Vertical FDI.
- Conglomerate FDI.
- Platform FDI.
Q- What are the reasons for foreign direct investment?
Ans- Some of the reasons why foreign direct investment is important are-
- Increase in Employment
- Economic Development
- Backward area Development
- The stipulation of funds and technologies
- Stabilising Exchange rates
- Better Capital Flow
Q- What are the dangers of FDI?
Ans- Some of the dangers that lurk around FDI are-
- Increase in Pollution
- Decay of Culture
- Diminish or Shut Down Small scale businesses
- Corruption via Politics
- Economic Inflation
- The sinking of cottage industries
- Deficiency of Trade
Q- What is the difference between vertical and horizontal FDI?
Ans- The major difference between vertical and horizontal FDI is-
- Vertical- When an acquisition is done by a multinational that acts as your official supplier or distributor.
- Horizontal- When any company or organization runs or moderates a similar business venture in another country.
Q- What are the components of FDI?
Ans- The forms for foreign direct investment are-
- Equity Capital
- Reinvested Earnings
- Intracompany Loans
Q- How does government attract foreign investment?
Ans- Some of the effective strategies to attract foreign direct investment are-
- Appealing Economic Structure
- Progressed Political Context
- Labor Charges
- Quality of Infrastructure
- Taxes charged by companies/organisations
- Growth of Economy
Q- What are the determinants of FDI?
Ans- Some of the mandatory determinants for foreign direct investment are-
- Volume of Market
- Political Perils
- Investment Returns
- Labor costing across states
- HC (Human Capital)
- Government Influences or Aids
- Exchange rates amongst countries
Q- What happens when FDI increases?
Ans- Some of the major changes that are observed in a country when FDI increases are-
- Economic Stabilisation
- Raise the exchange rate of receiving country
- Improvement in Trading
- The ratio of export to import prices will drastically change
Q- How do countries benefit from FDI?
Ans- These are some of the obvious ways in which countries benefit from FDI-
- Increase in Productivity
- Improvises Technological understanding
- Flattering work-force abilities
- Generating Business for Local Companies
- Develop higher-paying jobs
Q- Does FDI contribute to GDP?
Ans- Yes, Foreign Direct Investment immaculately contributes to GDP by doing the following-
- Increase in investment trend
- Developing a country's technological mindset
- Educating more people
- Creating modern skill-based employments
- Foundation of new start-ups