What is the full form of FDI?

Foreign Direct Investment is a type of investment in which an investor goes for an ownership stake for a foreign company or a project. A government or a company can also go for the same type of investment to get ownership of a company. FDI is used to make stable economies.

Types of FDI

FDI is of three types and we will discuss them here.

Horizontal

This is a type of FDI in which a business invests in a foreign country without making any changes in the core business.

Vertical

This is a type of FDI in which a company purchases another company in a foreign country.

Conglomerate

This is a type of FDI in which a company makes an investment in a company in a foreign country which has a different business and is not related to the investor. Such investors are inexperienced and do not know about the business which is being purchased

How does FDI work?

Companies and governments who want to go for foreign direct investment have to target the firms or projects in which investment has to be made. Investors look for those companies and projects which can help in the growth of their business with the help of an efficient workforce. Government regulations should also be followed while using FDI.

Many things are to be provided through FDI like technology, equipment, and management. The amount invested in 2021 went up to more than $1.8 trillion. The United States has invested the maximum amount and then come other countries like China, Canada, Brazil, and India.

Foreign investment is of two types which include organic and inorganic. In organic investment, a foreign investor has to invest funds for the acceleration and growth of different businesses. In the case of inorganic investments, an investor purchases an established business in a foreign country.

The Indian government is trying to bring large investments in different sectors like defence production, telecom sector, IT, oil refinement, etc. The economy of India can be easily developed through FDI as this investment is a non-debt financial resource. FDI has become a possibility because of internationalization and globalization.

Components of FDI

FDI has three components and we will discuss them here.

Equity Capital

Equity capital is a capital in which an investor in a company purchases the shares of a company in another country. An equity capital is a share of 10% or more that can be considered as a threshold to control assets.

Reinvested Earnings

It is a share of earnings of the foreign investor which cannot be dispersed as dividends by affiliates. This also refers to the earnings which cannot be given directly to the investor.

Intra-Company Loans

Intra-company loans are also known as intra-company debt transactions. This type of investment can be of either short or long term in which lending and borrowing transactions are conducted between investors and affiliate companies.

Routes which provide FDI to India

There are two routes through which India receives FDI and these routes are as follows −

Automatic Route

This is a type of route in which a foreign investor does not need any approval from the government or the RBI. Examples of this route are as follows −

• Medical devices
• Thermal power
• Railway infrastructure
• Pension
• Power exchange

Government Route

This is a route in which a foreign investor has to seek government permission before making an investment. The investor has to visit the Foreign Investor Facilitation Portal and file an application to get approval from the government. The application is sent to the respective ministry for approval or rejection after having a discussion with DPIIT (Department for Promotion of Industry and Internal Trade).

Sectors where FDI cannot be done

There are a few sectors where FDI cannot be done are listed below −

• Agriculture and plantation
• Atomic Energy generation
• Lotteries
• Trading in TDRs
• Housing
• Chit Funds Investment
• Betting and Gambling Business
• Tobacco Industry

Difference between FPI and FDI

FPI can be expanded as Foreign Portfolio Investment while FDI can be expanded as Foreign Direct Investment. Both of the investments have many differences and some of them are mentioned below −

Aspect	FPI	FDI
Definition	Investors can invest in stock exchanges, bonds, and many other types of securities.	Investors can invest in a foreign company or purchase it.
Investment type	Indirect	Direct
Purpose	Investment portfolio diversification and capitalization	Business operations expansion
Duration of investment	Short-term	Long-term
Return on investment	Return on investment is available through dividends, capital gains on financial assets, and interest	Return on investment is available through direct ownership and business operations

Advantages of FDI

FDI has many advantages and some of them are listed below −

• FDI helps in job creation.
• Employees get training to enhance their skills.
• The countries which are targeted for investment have access to different types of applications like financial tools and the latest technologies.
• FDI produces such goods which have global markets.
• Capital inflow is improved in those countries where there are limited resources.

Disadvantages of FDI

FDI has many disadvantages and they are listed below −

• Domestic investment may be mildly or severely impacted
• FDI can lead to political changes in many countries
• Exchange may be affected and can be a boon for one country and a bane for another
• Poor working conditions in the offices of multinational companies

Conclusion

Foreign Direct Investment (FDI) is an investment in which a company either purchases shares of a foreign company or purchases the whole company. If a foreign company has to invest in India, it can do so through two routes which are automatic and government. FDI can be used to boost the economy of a country and also create jobs.

FAQs

1. How Indian companies can receive foreign investments?

Indian companies can receive foreign investments through automatic and government routes.

2. Can investment made in India be repatriable?

Yes! The investment is repatriable but not in the case of NRIs if they choose the non-repatriable schemes.

3. Are Indian companies allowed to issue Foreign Currency Convertible Bonds?

Yes! Indian companies can issue Foreign Currency Convertible Bonds

4. Can foreign investment be done through preference shares

Yes! Foreign investment can be done through preference shares. This investment is known as Foreign Direct Investment.

5. Can a foreigner set up a company in India?

This permission is given only to NRIs and PIOs.