A foreign direct investment (FDI) is an investment in the form of a controlling ownership in a business in one country by an entity based in another country. It is thus distinguished from foreign portfolio investment by a notion of direct control.
Sameer DhuratStudent at Alkesh Dinesh Mody Institute For Finance and Management Studies
2. What Is FDI?
Foreign direct investment (FDI) is an investment made by a company or
individual in one country in business interests in another country, in the
form of either establishing business operations or acquiring business assets
in the other country, such as ownership or controlling interest in a foreign
It can be either by buying a company in the target country or by expanding
operations of an existing business in that country.
3. Types Of FDI
Horizontal − In case of horizontal FDI, the company does all the same activities
abroad as at home. For example, Toyota assembles motor cars in Japan and the
Vertical − In vertical assignments, different types of activities are carried out
abroad. In case of forward vertical FDI, the FDI brings the company nearer to a
market (for example, Toyota buying a car distributorship in America). In case
of backward Vertical FDI, the international integration goes back towards raw
materials (for example, Toyota getting majority stake in a tyre manufacturer or a
Conglomerate − In this type of investment, the investment is made to acquire an
unrelated business abroad. It is the most surprising form of FDI, as it requires
overcoming two barriers simultaneously – one, entering a foreign country and
two, working in a new industry.
4. Greenfield entry refers to activities or assembling all the elements right
from scratch as Honda did in the UK.
Foreign takeover means acquiring an existing foreign company – as Tata’s
acquisition of Jaguar Land Rover. Foreign takeover is often called mergers
and acquisitions (M&A) but internationally, mergers are absolutely small,
which accounts for less than 1% of all foreign acquisitions.
5. Vehicles Of FDI
Reciprocal distribution agreements − This type of strategic alliance is found
more in trade-based verticals, but in practical sense, it does represent a type of
direct investment. Basically, two companies, usually within the same or affiliated
industries, but from different nations, agree to become national distributors for
each other’s products.
Joint venture and other hybrid strategic alliances − Traditional joint venture
is bilateral, involving two parties who are within the same industry, partnering
for getting some strategic advantage. Joint ventures and strategic alliances offer
access to proprietary technology, gaining access to intellectual capital as human
resources, and access to closed channels of distribution in select locations.
Portfolio investment − For most of the 20th century, a company’s portfolio
investments were not considered a direct investment. However, two or three
companies with "soft" investments in a company could try to find some mutual
interests and use their shareholding for management control. This is another
form of strategic alliance, sometimes called shadow alliances.
6. FDI Inflow Route
Automatic Route: FDI in sectors /activities to the extent permitted under
the automatic route does not require any prior approval either of the
Government or the Reserve Bank of India.
Government Route: FDI in activities not covered under the automatic
route requires prior approval of the Government which are considered by
the Foreign Investment Promotion Board (FIPB), Department of Economic
Affairs, and Ministry of Finance.
7. Significance Of FDI
It helps to gain a foothold in a new geographic market.
It increases firm’s global competitiveness and positioning.
It helps in reducing costs in areas such as R&D, production, and distribution.
FDI is often seen as a catalyst for a country`s development and economic
Foreign direct investment allows company to accomplish several tasks.
1. Integration into global economy
2. Technology advancement
3. Increased competition
4. Improvement in human resource
8. Determinants Of FDI
Stable policies-(economic and socio)
Economic factors-(tax exemption, subsidies, loans)
Basic infrastructure(effective transportation, roads, power, communication n/w,
Availability of natural resources
9. FDI In India
FDI refers to capital inflows from abroad that are invested in or to enhance
the production capacity of the economy.
The main purpose of the study is to investigate the impact of FDI on
economic growth in India, from the period of 1990 to 2011.
10. FDI In India
Will be used for infrastructural development. (DMIC)
Will be helpful in capital development in various sectors.
Will build efficient supply chains.
Will provide jobs for millions through industrial investment.
Will bring in state-of-the-art foreign technology.
Many sectors allow only 49% so the effective control is still in India's hands.
The regulations are strict too so there wont be any exploitation.
Many leftists are worried about FDI because they think the colonialism will
repeat again. After all, the britishers were also a kind of FDIs.
But, the difference is that the British took capital out of India, but the FDIs in
this case will bring capital into India.
11. FDI Inflow In India
Foreign Direct Investment (FDI) inflows into India increased by 29 % to a
record $40 billion during in the financial year ended March.
If re-invested earnings ($10 billion), other capital ($4.4 billion) and equity
capital of unincorporated bodies ($1 billion) are taken into account along with
$40 billion worth equity inflows, the total FDI flows in FY'16 is the highest-ever
at $55.4 billion.
Maximum inflows (equity) were from Singapore ($13.69 billion), followed by
Mauritius ($8.35 billion), the US ($4.19 billion), the Netherlands ($2.64 billion)
and Japan ($2.61 billion).
The previous highest FDI inflow was in FY12 when the country received $46.55
billion, which was a 34 % increase over $34.8 billion it got in FY11.
12. Steps Taken By Government To
The Indian Government has taken a number of steps to show its willingness to
allow more foreign direct investment in the country.
In the infrastructure development sector, it has relaxed the norms pertaining to
area restriction, the laws regarding gaining a comfortable exit from a particular
project and the requirements relating to minimum capitalization.
If companies are ready to commit 30 percent of their investments for affordable
housing, then the rules for minimum capitalization and area restriction will be
It is expected that this will benefit the construction sector a lot, especially in the
form of greater investment inflow.
13. FDI In India Retail Sector
As of June 2016, the Government of India allowed FDI in single and multi brand
retailing along with the following conditions:-
1) Up to 100% FDI in single brand retail trading.
Products to be sold should be of a “single brand”. Product should be sold under
the same brand internationally. Eg- ikea, puma, Adidas, fasttrack
2) Up to 51% FDI in multi brand retail trading.
At least 100 million US$ must be invested into Indian company.
At least 50% of the total FDI is to be invested in back end infrastructure within 3
years. Eg-Walmart, tesko
14. FDI In India Service Sector
The Computer Software and Hardware enjoy the permission of 100% FDI
under automatic route.
The limit of FDI in Telecom sector was increased from 49% to 74%. FDI up
to 49% is permissible under automatic route .
Service sector also includes banking, insurance, outsourcing R&D, courier
15. FDI In Different Sector
Infrastructure : 10% of India's GDP is based on construction activity. Indian
government has plans to invest $1 trillion on infrastructure from 2012–2017. 40% of
this $1 trillion is to be funded by private sector. 100% FDI under automatic route is
permitted in construction sector for cities and townships.
Automotive: FDI in automotive sector was increased by 89% between April 2014 to
February 2015. India is 7th largest producer of vehicles in the world with 17.5 million
vehicles annually. 100% FDI is permitted in this sector via automatic route.
Automobiles shares 7% of the India's GDP.
Airlines: Foreigner investment in a scheduled or regional air transport service or
domestic scheduled passenger airline is permitted to 100,with FDI up to 49% permitted
under automatic route and beyond 49% through government approval. For airport
modernization, 100% FDI will be allowed for existing airport under automatic route.
Textile: Textile is one major contributor to India's export. Nearly 11% of India's total
export is textile. This sector has attracted about $1647 million from April 2000 to May
2015. 100% FDI is allowed under automatic route. During year 2013–14, FDI in textile
sector was increased by 91%. Indian textile industry is expected reach up to $141 billion
16. FDI In Different Sector
Broadcasting : FDI permitted for setting up hardware facilities such as up-linking, HUB,
etc. up to 49% under Government approval route. FDI permitted in Cable Network up to
49% under Government approval route. Foreign Investment (FDI/FII) up to 49% allowed
under Government approval route in Direct to Home Service Providers. FDI limited to 20%.
FDI permitted in FM radio up to 20% under Government approval route.
Petroleum : Petroleum and natural gas sector, other than refining and including market
study and formulation; setting up infrastructure for marketing - Automatic up to 100%. For
petroleum refining activity 100% FDI is permitted in Indian Private Companies under
automatic route and up to 26% FDI is permitted in Public Sector Undertakings with
Insurance : FDI up to 26% allowed on the automatic route. However, license from the
Insurance Regulatory & Development Authority (IRDA) has to be obtained. There is a
proposal to increase this limit to 49%
Drugs & Pharma : FDI up to 100% is permitted under the automatic route for manufacture
of drugs and pharmaceuticals (The following is the current position). FDI up to 74% in the
case of bulk drugs, their intermediates Pharmaceuticals and formulations would be covered
under automatic route. FDI above 74% for manufacture of bulk drugs will be considered by
the Government on case to case basis
17. Problems For Low FDI Flow To India
Lack of adequate infrastructure
Stringent labor laws
High corporate tax rates
18. FDI Is Not Permitted In The Following
Arms and ammunition.
Coal and lignite.
Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds,
Gambling and Betting
Business of Chit Fund
To increase employment and skill level
Technology diffusion and knowledge transfer
Linkages and spill over to domestic firms
Inflow of equipment and technology
Competitive advantages and innovation
Finance resource for expansive
Contribution to export growth
Improved consumer welfare through reduced cost, wider choice & improved
Provide access to global markets for Indian producer.