All that you need to know about FDI in India

In a globalized world today, foreign direct investment (FDI) is becoming all the more important than trade as a mode of international economic transactions.

IMF (1997) defined FDI as

“Investment that is made to acquire a lasting interest in an enterprise operating in an economy other than that of investor. The investor’s purpose being to have an effective voice in the management of the enterprise.”

 

There are two types of investment :-

• Direct investment which implies that investment is done under control that is an ownership share of at least 10% or 25%
• Portfolio investment is the investment which is not direct investment that is investment devoid of control .This investment affects exchange rate.

The capital movement in the form of FDI is advantageous to the economies of both lending and borrowing countries.

Major areas of FDI are: oil, coal and ores, service sector including banking, marketing, legal, financial services.

 

OBJECTIVES OF FDI

Firms are motivated to indulge in FDI with the following objectives:-

• Sales expansion
• Resource acquisition
• Risk minimisation in competition
• Diversification of assets and risk

 

FDI may be distinguished into

(1) Horizontal foreign investment

It means the investment of a firm in a foreign country to produce the same product which it produces in its home country.

FDI is undertaken in the same industry by the firm as it operates in at home. For example, Electrolux-a Swedish firm-the manufacturer of household appliances such as refrigerators, washing machines, air conditioners etc invested in Asia and Eastern Europe for producing the same products.

It implies geographical diversification of the firm’s product line and HFI represents intra-firm product transfer in the process of integration in marketing

(2) Vertical foreign investment

It implies integration process in the production which may be backward vertical investment or forward vertical investment.

BVI means that firms invest in a foreign country in producing the final stage goods or assembly of products to market it directly to foreign buyers. It involves establishment of an assembly of product or sales branch for exports.

IMPACT OF FDI IN INDIA

FDI has both positive and negative impact on an economy. Some positive effects are as follows:-

• Capital and technology transfer
• Transfer of managerial know how and expertise
• New products in the market
• Increase in machinery
• Provides skilled labor force
• Increases industrial advancement
• Diversification
• Employment creation
• Improve substitutions
• Increases competition
• Stimulation of domestic economy through new ideas, technology, products, skills and capital

Negative effects of FDI are as follows:-

• Threat to domestic industries through increased competition
• Increased dependence of host country on foreign technology
• Bad effects on host country’s culture, values and lifestyles
• Distortions in wage structure or salaries
• Political distortions

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