☰
✕

Foreign Direct Investment(FDI) 101: A Complete Guide

Sukanya Mukherjee -

FDI- A curse or boon for the economy?

  1. People generally get confused when talking about FDI and how it will affect your country.
  2. Will it help in better job opportunities, will it help in improving the cities lifestyle and so much more?
  3. What many fail to understand is its true purpose of serving any nation.
  4. 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

  1. Horizontal FDI is where funds are invested overseas in the same or similar business.
  2. In general terms, business finances in a foreign brand that designs similar products.
  3. For example, Loreal, a US-based giant, may purchase Avene, a France based skincare company.
  4. 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

  1. A gigantic and generally a long term investment plan that doesn't require involvement in the same or similar industry at all.
  2. This method of investment offers the company substantial funding in order to increase their business and expand their branches on a global level.
  3. For example, Walmart, a US retail chain might easily invest in Bajaj, an Indian automobile and electronics manufacturing giant.
A pie-chart showing FDI sector distribution

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?

  1. 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.
  2. 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.

In Conclusion

  1. FDI will help get access to better technology, resources, funding, and many more that will ultimately help in the development of the Indian economy.
  2. 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.
  3. Along with that, the government gets to build long term business relations for a brighter future.

Also read:


1. GST and How is it Treating India so far?

2. How to pay GST online? Step-by-Step Guide

3. Secret Powers Of Women Entrepreneurs

4. Top 10 Tips That Will Make Your Business Successful

FAQs

Q- What are the 4 types of foreign direct investment?

Ans- The 4 types of FDI or foreign direct investment are-

  1. Horizontal FDI.
  2. Vertical FDI.
  3. Conglomerate FDI.
  4. 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-

  1. Increase in Pollution
  2. Decay of Culture
  3. Diminish or Shut Down Small scale businesses
  4. Corruption via Politics
  5. Economic Inflation
  6. The sinking of cottage industries
  7. 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-

  1. Equity Capital
  2. Reinvested Earnings
  3. 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
  • Newness

Q- What are the determinants of FDI?

Ans- Some of the mandatory determinants for foreign direct investment are-

  1. Openness
  2. Volume of Market
  3. Political Perils
  4. Infrastructure
  5. Investment Returns
  6. Labor costing across states
  7. HC (Human Capital)
  8. Agglomeration
  9. Government Influences or Aids
  10. 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-

  1. Increase in Productivity
  2. Improvises Technological understanding
  3. Flattering work-force abilities
  4. Generating Business for Local Companies
  5. 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