FOREIGN DIRECT INVESTMENT

An investment made by a company or entity based in one country, into

a company or entity based in another country. Entities making direct
investments typically have a significant degree of influence and control
over the company into which the investment is made. Open economies
with skilled workforces and good growth prospects tend to attract larger
amounts of foreign direct investment than closed, highly regulated
economies.
Investment from one country into another (normally by companies
rather than governments) that involves establishing operations or
acquiring tangible assets,
The International including
Monetary stakes
Fund in otherFDI
defines businesses.
as when one
The purchase or establishment of income-generating assets in a
individual or business owns 10% or more of a foreign
foreign country that entails the control of the operation or organisation.
company's capital. Every financial transaction afterwards
is considered by the IMF as an additional direct
investment. If an investor owns less than 10%, it is
considered as nothing more than an addition to his/her
stock portfolio.
Strategically FDI comes in three types:

- Horizontal: where the company carries out the same activities

abroad as at home (for example, Toyota assembling cars in
both Japan and the UK.)

- Vertical: when different stages of activities are added abroad.

Forward vertical FDI is where the FDI takes the firm nearer to
the market (for example, Toyota acquiring a car
distributorship in America) and Backward Vertical FDI is
where international integration moves back towards raw
materials (for example, Toyota acquiring a tyre manufacturer
or a rubber plantation).

- Conglomerate: where an unrelated business is added

abroad. This is the most unusual form of FDI as it involves
attempting to overcome two barriers simultaneously -
entering a foreign country and a new industry. This leads to
the analytical solution that internationalisation and
Integration into global economy - Developing countries, which invite
FDI, can gain access to a wider global and better platform in the
world economy.

Economic growth - This is one of the major sectors, which is

enormously benefited from foreign direct investment. A remarkable
inflow of FDI in various industrial units in India has boosted the
economic life of country.

Trade - Foreign Direct Investments have opened a wide spectrum of

opportunities in the trading of goods and services in India both in
terms of import and export production. Products of superior quality
are manufactured by various industries in India due to greater
amount of FDI inflows in the country.

Technology diffusion and knowledge transfer – FDI apparently helps

in the outsourcing of knowledge from India especially in the
Information Technology sector. Developing countries by inviting FDI
can introduce world-class technology and technical expertise and
Increased competition - FDI increases the level of competition in
the host country. Other companies will also have to improve on
their processes and services in order to stay in the market. FDI
enhanced the quality of products, services and regulates a
particular sector. Linkages and spillover to domestic firms-
Various foreign firms are now occupying a position in the Indian
market through Joint Ventures and collaboration concerns. The
maximum amount of the profits gained by the foreign firms
through these joint ventures is spent on the Indian market.

Human Resources Development - Employees of the country

which is open to FDI get acquaint with globally valued skills.

Employment - FDI has also ensured a number of employment

opportunities by aiding the setting up of industrial units in various
corners of India.
Why FDI is Opposed by Local People or Disadvantages of
FDI :
(a) Domestic companies fear that they may lose their
ownership to overseas company
(b) Small enterprises fear that they may not be able to
compete with world class large companies and may
ultimately be edged out of business;
(c) Large giants of the world try to monopolise and take
over the highly profitable sectors;
(d) Such foreign companies invest more in machinery and
intellectual property than in wages of the local people;
(e) Government has less control over the functioning of
such companies as they usually work as wholly owned
subsidiary of an overseas company;
The factors that can narrow the gap between FDI approvals and
actual foreign direct investment inflows and indeed make India a
preferred destination for global capital are,

1.Availability of infrastructure in all areas i.e. transports hospitality,

telecom, power, etc.
2.Transparency of processes, policies and decision making and
reduction of government decision making lead time.
3.Stability of policies i.e. entry, exit, labour laws, etc. over a definite
time horizon so that definite plans can be made.
4.Acceptance of International Standards including accounting
standards.
5.Capital account convertibility so that all capital and payments can
flow easily in and out of the economy.
6.Simplification of the regulatory framework in general and tax laws.
7.Improvement in bandwidth for internet and data communication.
8.Improvement in the enforcement of intellectual property rights.
9.Implementation of the WTO agreement full. All investments foreign
and domestic are made under the expectation of future profits. The
 FDI and FII - Both FDI and FII is related to investment in a foreign country

FDI or Foreign Direct Investment is an On the contrary, FII or Foreign Institutional

investment that a parent company makes in Investor is an investment made by an
a foreign country. investor in the markets of a foreign nation.

FDI (Foreign Direct Investment) is when a
foreign company invests in India directly by
setting up a wholly owned subsidiary or
getting into a joint venture, and conducting
their business in India.
FII is when foreign investors invest in the
shares of a company that is listed in India, or
in bonds offered by an Indian company.

• IBM India is a wholly owned subsidiary of If a foreign investor buys shares in Infosys
IBM, and is a good example of FDI where then that qualifies as FII Investment.
a foreign company has set up a subsidiary
in India and is conducting its business
through that company.
• Foreign companies partnering with Indian
companies to set up joint ventures is
more typical and Starbucks  partnering
with Tata Global Beverages Limited is a
recent example of FDI through joint
venture,
FDI investments are more stable. FDI not
only brings in capital but also helps in good
governance practices and better
management skills and even technology
transfer. Companies like IBM set up offices,
hire employees, and have a long term plan
for the country. IBM can’t just pull out a few
million dollars from India overnight.
Foreign Direct Investment only targets a
specific enterprise. It aims to increase the
enterprises capacity or productivity or
change its management control. FDI flows
into primary market.
In FII, the companies only need to get
registered in the stock exchange to make
investments. The Foreign Institutional
Investor is also known as hot money as the
investors have the liberty to sell it and take it
back. It is unstable as compared to FDI.
The FII investment flows only into the
secondary market. It helps in increasing
capital availability in general rather than
enhancing the capital of a specific
enterprise.
ACCORDING TO JULY, 2013