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Foreign Direct Investment (FDI)

What is FDI?

Foreign Direct Investment (FDI) is an investment made by an investor from one country into a business located in another country. The foreign investor gains control over the company purchased, engaging directly in the production or business operations in the target country. This type of investment can be made by either purchasing a company or expanding operations of an existing business abroad.

Types of FDI

By Target

  • Horizontal FDI: This occurs when a company replicates its home country-based activities at the same level in a foreign country. For example, Toyota assembling cars in both Japan and the UK.

  • Vertical FDI: This involves different stages of production:

  • Forward Vertical FDI: Moves closer to the market, such as Toyota acquiring a car dealership in America.
  • Backward Vertical FDI: Moves towards raw materials, such as Toyota acquiring a tire manufacturer.

By Motive

  • Resource Seeking: Searching for cheaper resources.
  • Market Seeking: Aiming to increase market share and sales in a foreign market.
  • Efficiency Seeking: Establishing efficient operations through advantageous factors like culture, policies, or markets.
  • Strategic Asset Seeking: Acquiring assets that help achieve long-term corporate goals.

By Direction

  • Inward FDI: Foreign entities invest in local companies.
  • Outward FDI: Domestic firms expand their operations into foreign markets, either by acquiring a company or expanding an existing facility.

By Entry Modes

  • Greenfield Investments: Direct investment in new facilities or the expansion of existing facilities. Examples include manufacturing plants, offices, etc.
  • Mergers and Acquisitions: Mergers combine two companies into a new entity, while acquisitions involve one company buying another.

Benefits of FDI

  • Enhances the foreign exchange position of the country.
  • Generates employment and increases production.
  • Aids in capital formation by bringing in fresh capital.
  • Facilitates the transfer of new technologies and management skills.
  • Increases exports and tax revenues.

Disadvantages of FDI

  • Domestic companies may lose ownership to foreign companies.
  • Small businesses may struggle to compete against larger, international firms.
  • Foreign investments might focus more on machinery and intellectual property than on local wages.
  • Reduced governmental control over companies that operate as wholly owned subsidiaries of foreign entities.

FDI in India and Its Role

In India, FDI has been instrumental in driving economic growth and development. It has brought financial stability, helped address pressing economic needs, and boosted sectors that require development. The influx of foreign capital has enabled India to focus on various challenges that affect the country.

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