Foreign Direct Investment (FDI)

Foreign direct investment (FDI) is an investment in a business by an investor from another country
for which the foreign investor has control over the company purchased. The Organization of Economic
Cooperation and Development (OECD) define control as owning 10% or more of the business.
Businesses that make foreign direct investments are often called multinational corporations
(MNCs) or multinational enterprises (MNEs). A MNE may make a direct investment by creating a
new foreign enterprise, which is called a Greenfield investment, or by the acquisition of a foreign firm,
either called an acquisition or Brownfield investment.

Methods of Foreign direct Investment

Foreign direct investments can be made in a variety of ways, including the opening of
a subsidiary or associate company in a foreign country, acquiring a controlling interest in an existing
foreign company, or by means of a merger or joint venture with a foreign company. Foreign direct
investments are commonly categorized as being horizontal, vertical or conglomerate in nature:

Horizontal direct investment- Refers to the investor establishing the same type of business operation in
a foreign country as it operates in its home company, for example, a cell phone provider based in US
opening up stores in India.

Vertical Investment - A vertical investment is one in which different but related business activities
from the investor's main business are established or acquired in a foreign country, such as when a
manufacturing company acquires an interest in a foreign company that supplies parts or raw materials
required for the manufacturing company to make its products.

Conglomerate type foreign direct Investment This type of investment is the one where company or
individual makes a foreign direct investment in a business that is unrelated to its existing business in
its home country.

Retail sector in India

Retailing in India is slightly different than in developed markets, in that it is divided in to organized
and unorganized retail. Organized retail could be described as when trading is taking place under a
license or through people that are registered for sales tax or income tax. Unorganized retail is Indias
more traditional style of low-cost retailing, for example, the local kirana shops, owner-manned general
stores, convenience stores, hand carts and pavement vendors. This division of the retail sector, which
has a very heavy weighting towards, unorganized, is just one of the issues contributing to the sensitive
debate on FDI in India at the moment. From street/cart retailers working on pavements/ roadsides and
small family run businesses to international brands such as Rolex and Nike, the retail market in India
is vibrant, colorful and highly fragmented. As retailing in India is attracting the attention of many
global players, the Indian Government is paying increased attention to the countrys retail
environment. FDI in retailing remains a widely debated and heated issue in Indias economic and
political environment. However, the Government is gradually taking steps to open the sector That
India should be well on the radar for foreign retailers was recently supported by A.T. Kearney, whose
2011 Global Retail Development Index ranks the nation as fourth globally. Indias retail industry is
estimated to be worth approximately US$411.28 billion and is still growing, expected to reach
US$804.06 billion in 2015. As part of the economic liberalization process set in place by the Industrial
Policy of 1991, the Indian government has opened the retail sector to FDI slowly through a series of
steps.

FDI in Retail

FDI has become a vital part in every country more particularly with the developing countries. This is
because of the following reasons

i. Availability of cheap labor

ii. Uninterrupted availability of raw material
iii. Less production cost compared with other developed countries
iv. Quick and easy market penetration.

In 2011, The Cabinet approved 51 per cent FDI in multi-brand retail, a decision that would allow
global mega chains like Wal-Mart, Tesco and Carrefour to open outlets in India. The Cabinet increased
the foreign investment (FDI) ceiling to 100 per cent from the present 51 per cent in single-brand
retail.

Advantages-
 - It helped in cutting intermediaries between farmers and the retailers, thereby helping them get
more money for their produce
- It helped in bringing down prices at retail level and calm inflation
- Big retail chains invested in supply chains which reduced wastage
- Small and medium enterprises now have a bigger market, along with better technology and
branding
- It brought much-needed foreign investment into the country, along with technology and global
best-practices
- It created employment opportunities
- It induced better competition in the market, thus benefiting both producers and consumers

Disadvantages
The FDI capping set off fears that multinational giants will put small retailers and local shops that
service households will be wiped out. FDI in multi-brand retail has many pre-conditions, though. The
minimum FDI limit has been set at $100 million. Half of any investment has to be made in
infrastructure like cold-storage chains and warehouses. This is designed to help the agricultural sector
and India has a severe shortage of these. The most problematic condition, from the point of view of
investors, will be that at least 30 per cent of the goods to be sold will have to be sourced from local
producers. Analysts say that MNCs might have a problem of quality control and supply.

In June 2016, The Government of India also allowed 100% FDI in retailing of food products The
rationale for this change was explained in budget speech earlier this year when the Finance Minister
referred to the chronic problems faced by the food processing sector in India - cases of farmers failing
to receive fair price for their produce and lack of adequate back-end infrastructure that resulted in
produce not reaching markets for consumption.

Advantages

It marks a departure from the previous FDI policy on multi brand retail trade which had been a subject
matter of intense political and economic debate over the past few years and is often considered as the
yardstick for FDI reforms in India. The policy to allow 100% FDI in retailing of food products without
any conditionality and caps was a huge step forward and could help in gradual expansion of the scope
of what is permitted to be traded.

The policy allowed for retail trading in food products through brick and mortar as well as e-commerce
platforms. This is a welcome departure from the previous policy stance where differential e-commerce
in the B to C space is generally subject to greater restrictions in the retail space as compared to the
brick and mortar operators.