Foreign Direct Investment

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 Organisation of Economic Co-operation and Development (OECD) defines control as owning 10% or more of the business. Businesses that make foreign direct investment are after called Multinational Corporations (MNCs) or Multinational Enterprises (MNEs).

⇒ A MNE(Multinational Enterprises) may create a new foreign enterprise by making a direct investment, which is called a greenfield investment.

⇒ A MNE may make a direct investment by the acquisition of a foreign firm, which is called an acquisition or prownfield investment.

Advantages of foreign Direct Investment

  1. Economic Development Stimulation.
  2. Easy International Trade.
  3. Employment and Economic Boost.
  4. Development of human capital Resources.
  5. Tax incentives.
  6. Resource Transfer.
  7. Reduced disparity between revenues and costs.
  8. Increased productivity.
  9. Increment in income.

Disadvantages of Foreign Direct Investment

  1. Hindrances to domestic Investment.
  2. Risk from political changes.
  3. Negative influence on exchange rates.
  4. Higher costs.
  5. Economic non-viability.
  6. Expropriation.
  7. Modern-day Economic colonialism.

⇒ FDI, being a non-debt capital flow, is a leading source of external financing, especially for the developing economies. It not only brings in capital and technical know-how but also increases the competitiveness of the economy. Overall it supplements domestic investment, much required for sustaining the high growth rate of the country. Since 2000, significant changes have been made in the FDI policy regime by the Government to ensure that India becomes an increasingly attractive and investor-friendly destination.

⇒ The current phase of FDI policy is characterized by negative listing, permitting FDI freely except in a few sectors indicated through a negative list. Under the current policy regime, there are three broad entry options for foreign direct investors.

⇒ In some sectors, FDI is not permitted (negative list);

⇒ In another small category of sectors, foreign investment is permitted only till a specified level of foreign equity participation, and

⇒ The third category,comprising all the other sectors, is where foreign investment up to 100 %of equity participation is allowed. The third category has two subsets –

  1. one consisting of sectors where automatic approval is granted for FDI (often foreign equity participation less than 100 %), and
  2. the other consisting of sectors where prior approval from the Foreign Investment Approval Board (FIPB) is required.

⇒ FDI policy changes increasingly reflect the requirements of industry and are based on stakeholder’s consultation. Upfront listing of negative sectors has helped focus on reform areas, which are reflected in buoyant FDI inflows.

The following are some of the sectors with 100% FDI

⇒ Advertising, agriculture, air transport services (domestic airlines), courier services, drugs and pharmaceuticals, electricity, power, films and studios, hotel and tourism, housing and real estate, construction, mass rapid transport system, mining (gold and silver), NBFC, marketing, pipelines and refining of petroleum products, tourism, transport infrastructure, townships, SEZs, railways, single brand retail (upto 49% automatic and from 49 to 100% has to be approved by FIPB), telecommunications (upto 49% automatic, 49-100% by FIPB), and asset reconstruction companies (upto 49% automatic, 49-100% by FIPB).

74% FDI

⇒ Airports, broadcasting, coal and lignite, credit information companies, direct to home (DTH), mining (diamonds & precious stones), satellites, and private sector banking are the sectors with FDI limit of 74%.

26-49% FDI

⇒ Airlines/aviation, defence, insurance and pension are the sectors which have 49% FDI limit. Sectors with 26% FDI limits print media (newspaper – 26%, scientific & periodicals – 100%) and FM radio. Public sector Banks have the lowest FDI limit of 20%.

FDI In India

FDI during 2015 – $ 39.32 billion

Highest FDI attracted sectors – Computers Hardware & Software, Services, Trading business, Automobiles & Chemicals.

Biggest FDI source – Singapore, Mauritius, US, Netherlands and Japan