Foreign direct investment (FDI) refers to long term participation by a country into another country. It usually involves participation in management, joint-venture, transfer of technology, managing supply chain, distributing and expertise etc.

FDI is an important source of private external (foreign) finance for developing countries. It is different from other major types of external private capital flows in which it is motivated largely by the investors’ long-term prospects for making profits in production activities that they directly control.

Why FDI is important?

FDI helps in diversifying investor’s portfolio, it promotes stable long term lending. It infuses new technology in developing nations, it provides financing to developing countries. Most importantly, it brings in technological knowhow and managerial expertise, it creates more jobs and opportunities, it also helps in improving infrastructure in the developing countries, and it helps in raising living standards in emerging economies. So overall, it facilitates economic growth or repair.

Today, India has become one of the most attractive destinations for foreign direct investments thanks to liberalised norms, easy policies and subsidised rates. Foreign investors are also willing to invest in the country due to lower labour costs, market diversification, subsidies, and preferential tariffs. A foreign investor can invest in an Indian business through some of these routes: acquiring voting stock in a foreign company, mergers and acquisitions, joint ventures with foreign corporations and starting a subsidiary of a domestic firm in a foreign country.

What does FDI Comprise?

The foreign direct investment shows the transfer of technological innovation between two countries such as India and America on the basis of transfer of knowledge, policies between two countries. So we can conclude that this foreign direct investment helps two countries to innovate their technology and liberalizing the policies between each country.

FDI is a measure of foreign ownership of productive assets, such as factories, mines and land. Increasing foreign investment can be used as one measure of growing economic globalization. The largest flows of foreign investment occur between the industrialized countries (North America, Western Europe and Japan). But flows to non-industrialized countries are seen increasing sharply.

There are two forms of FDI

One is inward foreign direct investment and the other is outward foreign direct investment. Inward stocks are all direct investments held by non- residents in the reporting economy; outward stocks are the investments of the reporting economy held abroad.

Inward Foreign Direct Investment  

It is the value of foreign investors’ equity in and net loans to enterprises resident in the reporting economy. For example, some key companies functioning in India include Emaar (Real Estate), DP World (Dubai Ports World) is a logistic company, Abu Dhabi National Oil Company, Abu Dhabi National Energy Company, Drake and Scull International (Engineering).

Outward Foreign Direct Investment

It is an outward direct investment (ODI) is a business strategy in which a domestic firm expands its operations to a foreign country. This can take form as a green field investment, a merger/acquisition, or expansion of an existing foreign facility.

A Greenfield project is simply a new project, not building on anything existing. The analogy is to building on a green field – there are no existing buildings or infrastructure. This is opposed to brownfield projects – which would involve changes and maintenance to an existing piece of work.

Some examples of ODI are the Indian firms which have done outward FDI are Tata Motors Ltd., Suzlon Energy Ltd., Tata Chemicals Ltd., United Phosphorus Ltd., Wipro Ltd. and Dr. Reddy’s Laboratories Ltd. Tata-Coros, Suzlon Energy made an investment of USD 674.79 million in its wholly owned subsidiary in Netherlands. Bharti Airtel committed USD 3.35 billion in its joint venture in the Netherlands that is into the business of transport, storage and communication services. GMR Infrastructure invested USD 306.93 million in its wholly-owned unit in Mauritius and Amtek Auto made an investment of USD 286.72 million in two separate projects in Germany and Singapore.

What is India’s FDI policy

India’s FDI policy allows foreign investment in certain sectors under the automatic route and up to the limit set out in that sector. For instance 100 per cent FDI is permitted under the automatic route in manufacturing, oil and gas, Greenfield airports, construction, railway infrastructure etc.

But, it is worth noting that on 17 April 2020, India changed its foreign direct investment (FDI) policy to protect Indian companies from “opportunistic takeovers/acquisitions of Indian companies due to the current COVID-19 pandemic”, according to the Department for Promotion of Industry and Internal Trade.

What are the various types of FDI?

Horizontal FDI

It refers to investing FDI in similar sector of business, for example, an automobile company investing in another automobile company overseas. Toyota assembles cars in both the United States and China.

Few other examples of horizontal integration in recent years include Marriott’s 2016 acquisition of Sheraton (hotels) AstraZeneca’s 2015 acquisition of ZS Pharma (biotech), Volkswagen’s 2012 acquisition of Porsche (automobiles), Facebook’s 2012 acquisition of Instagram.

Vertical FDI

Vertical foreign direct investment occurs when a multinational acquires an operation that either acts as a supplier or distributor.  Companies engaging in vertical FDI typically seek to either lower the cost of raw materials or gain greater control of their supply chain.

Zara retains more control over their supply chain than most retailers globally, because it is vertically integrated, meaning they have ownership of their supply chain.

Apple builds great hardware, owns the core software experience, optimizes its software for that hardware, equips it with web services (iTunes and iCloud), and finally controls the selling experience through its own retail stores.

Conglomerate FDI

It is a conglomerate type of foreign direct investment is one where a company or individual makes a foreign investment in a business that is unrelated to its existing business in its home country. Thus, in conglomerate investments, a business acquires an unrelated business in a foreign country.

Warren Edward Buffett is an American investor, business tycoon, philanthropist, and the chairman and CEO of Berkshire Hathaway. He is considered one of the most successful investors in the world and has a net worth of US$78.9 billion as of August 2020, making him the world’s seventh-wealthiest person. Through years of acquisitions and mergers, Berkshire Hathaway is responsible for the ownership of companies that provide utilities, retail goods, transportation, and other services, as well as the insurance and other financial services it is perhaps most well known for.

Who are the Largest recipients of FDI in world

The United States remained the largest recipient of FDI, attracting $251 billion in inflows, followed by China with flows of $140 billion and Singapore with $110 billion. (Jan 2020)

Singapore emerged as the largest source of FDI in India during the last fiscal with $ 14.67 billion investments. It was followed by Mauritius ($ 8.24 billion), the Netherlands ($ 6.5 billion), the US ($ 4.22 billion), Caymen Islands ($ 3.7 billion), Japan ($ 3.22 billion), and France ($ 1.89 billion). (May 2020)