2. 1. Introduction of FDI
2. Types of Foreign Direct Investment
3. Methods of Foreign Direct Investment
4. FDI in Retail
5. FDI in India
6. FDI Routes in India
7. Government Methods to Improve FDI in India
3. Foreign direct investment (FDI) is a key element in international economic
integration because it creates stable and long-lasting links between economies. FDI
is a category of cross-border investment in which an investor resident in one
economy establishes a lasting interest in and a significant degree of influence over
an enterprise resident in another economy. Ownership of 10 percent or more of the
voting power in an enterprise (also known as establishing lasting interest) in one
economy by an investor in another economy is evidence of such a relationship. FDI
is an important channel for the transfer of technology between countries, promotes
international trade through access to foreign markets, and can be an important
vehicle for economic development.
In simple words, any investment from an individual or firm that is located in a
foreign country into a country (where the individual or firm gets the right to
intervene) is called Foreign Direct Investment.
4. Generally, FDI is when a foreign entity acquires ownership or controlling stake in
the shares of a company in one country, or establishes businesses there.
It is different from foreign portfolio investment where the foreign entity merely
buys equity shares of a company.
In FDI, the foreign entity has a say in the day-to-day operations of the company.
FDI is not just the inflow of money, but also the inflow of technology, knowledge,
skills and expertise/know-how.
It is a major source of non-debt financial resources for the economic development
of a country.
FDI generally takes place in an economy which has the prospect of growth and also
a skilled workforce.
The determinants of FDI in host countries are:
Policy framework
Rules with respect to entry and operations/functioning (mergers/acquisitions
and competition)
Political, economic and social stability
Treatment standards of foreign affiliates
International agreements
Trade policy (tariff and non-tariff barriers)
Privatization policy
5. Foreign direct investment offers advantages to both the investor and the foreign host
country. These incentives encourage both parties to engage in and allow FDI. Below are
some of the benefits for businesses:
Market diversification
Tax incentives
Lower labor costs
Preferential tariffs
Subsidies
The following are some of the benefits for the host country:
Economic stimulation
Development of human capital
Increase in employment
Access to management expertise, skills, and technology
For businesses, most of these benefits are based on cost-cutting and lowering risk. For host
countries, the benefits are mainly economic.
6. Despite many benefits, there are still two main disadvantages to FDI, such as:
Displacement of local businesses
Profit repatriation
The entry of large firms, such as Walmart, may displace local businesses. Walmart is
often criticized for driving out local businesses that cannot compete with its lower
prices.
In the case of profit repatriation, the primary concern is that firms will not reinvest profits
back into the host country. This leads to large capital outflows from the host country.
As a result, many countries have regulations limiting foreign direct investment.
7. Typically, there are two main types of FDI: horizontal and vertical FDI.
Horizontal: a business expands its domestic operations to a foreign country. In this case,
the business conducts the same activities but in a foreign country. For example,
McDonald’s opening restaurants in Japan would be considered horizontal FDI.
Vertical: a business expands into a foreign country by moving to a different level of the
supply chain. In other words, a firm conducts different activities abroad but these
activities are still related to the main business. Using the same example, McDonald’s
could purchase a large-scale farm in Canada to produce meat for their restaurants.
However, two other forms of FDI have also been observed: conglomerate and platform
FDI.
Conglomerate: a business acquires an unrelated business in a foreign country. This is
uncommon, as it requires overcoming two barriers to entry: entering a foreign country
and entering a new industry or market. An example of this would be if Virgin Group,
which is based in the United Kingdom, acquired a clothing line in France.
Platform: a business expands into a foreign country but the output from the foreign
operations is exported to a third country. This is also referred to as export-platform FDI.
Platform FDI commonly happens in low-cost locations inside free-trade areas. For
example, if Ford purchased manufacturing plants in Ireland with the primary purpose of
exporting cars to other countries in the EU.
9. Any investment from an individual or firm that is located in a foreign country into a
country (where the individual or firm gets the right to intervene) is called Foreign
Direct Investment. Amazon opening a new headquarters in Vancouver, Canada would
be an example of this.
Reinvesting profits from overseas operations as well as intra-company loans to overseas
subsidiaries are also considered foreign direct investments.
There are multiple methods for a domestic investor to acquire voting power in a foreign
company. Below are some examples:
Acquiring voting stock in a foreign company
Mergers and acquisitions
Joint ventures with foreign corporations
Starting a subsidiary of a domestic firm in a foreign country
10. Retail is very influent in India. Although, most of the Indian retail market comes under
unorganized sector, still it is one of the world’s biggest retail industry.
The Indian retail market is said to be worth USD 600 billion. It comes in the top-five retail
markets worldwide by economic value.
In terms of economy, retail is one of the pillars of the Indian economy with the sector
contributing to about 12% of the Gross Domestic Product (GDP).
The central government has approved 100% FDI in single-brand retail and 51% FDI in
multi-brand retail.
India is expected to attract USD 100 billion foreign direct investment (FDI) in 2022-23 on
the back of economic reforms and ease of doing business in recent years. It also said the
current financial year is expected to attain a GDP growth of more than 8 per cent.
11. Growth in the economy – when foreign companies come in, new infrastructure will be
built. Sectors like real estate and banking will see growth. Also, MNCs will pay a lot of
taxes to the Indian government which again can be used to build infrastructure.
Employment generation – FDI in retail will create a lot of jobs in the organized retail
sector.
Foreign companies can bring in better technology, management best practices, and more
learning for Indian players.
Benefits for consumers – FDI in retail implies low prices and better and more variety of
products for consumers to choose from. They will also get access to international brands.
12. FDI may drain out the country’s revenue share to foreign countries which can harm the
nation’s overall economy.
The domestic retail players might not be able to withstand the competition from MNCs
and may be wiped out from the market or at least absorbed by the bigger players.
Prices may be brought down initially, but once the MNCs get a stronghold in the
market, they can cause price rise and may also form cartels harming the consumers.
The predatory pricing policies of these big retailers will harm small and medium
players in the sector.
13. The investment climate in India has improved tremendously since 1991 when the
government opened up the economy and initiated the LPG strategies.
The improvement in this regard is commonly attributed to the easing of FDI norms.
Many sectors have opened up for foreign investment partially or wholly since the
economic liberalization of the country.
Currently, India ranks in the list of the top 100 countries in ease of doing business.
FDI received in the first 5 months of 2020-21 (USD 35.73 billion) is 13% higher as
compared to the first five months of 2019-20 (USD 31.60 billion). This estimate keeps
increasing with the current estimates of reaching 100 billion USD in 2022-23.
14. There are three routes through which FDI flows into India. They are as follows:
Category 1 - 100% FDI permitted through Automatic Route
Category 2 - Up to 100% FDI permitted through Government Route
Category 3 - Up to 100% FDI permitted through Automatic + Government Route
Automatic Route: Indian companies engaged in various industries can issue shares to
foreign investors up to 100% of their paid up capital in Indian companies
Government Approval Route: Certain activities that are not covered under the
automatic route require prior Government approval for FDIs.
15. In the automatic route, the foreign entity does not require the prior approval of the
government or the RBI.
Examples:-
Medical devices: up to 100%
Thermal power: up to 100%
Services under Civil Aviation Services such as Maintenance & Repair Organizations
Insurance: up to 49%
Infrastructure company in the securities market: up to 49%
Ports and shipping
Railway infrastructure
Pension: up to 49%
Power exchanges: up to 49%
Petroleum Refining (By PSUs): up to 49%
16. Under the government route, the foreign entity should compulsorily take the approval of
the government. It should file an application through the Foreign Investment
Facilitation Portal, which facilitates single-window clearance. This application is then
forwarded to the respective ministry or department, which then approves or rejects the
application after consultation with the DPIIT (Department for Promotion of Industry
and Internal Trade).
Examples:
Broadcasting Content Services: 49%
Banking & Public sector: 20%
Food Products Retail Trading: 100%
Core Investment Company: 100%
Multi-Brand Retail Trading: 51%
Mining & Minerals separations of titanium bearing minerals and ores: 100%
Print Media (publications/printing of scientific and technical magazines/specialty
journals/periodicals and a facsimile edition of foreign newspapers): 100%
Satellite (Establishment and operations): 100%
Print Media (publishing of newspaper, periodicals and Indian editions of foreign
magazines dealing with news & current affairs): 26%
17. There are some sectors where any FDI is completely prohibited. They are:
Agricultural or Plantation Activities (although there are many exceptions like
horticulture, fisheries, tea plantations, pisciculture, animal husbandry, etc.)
Atomic Energy Generation
Nidhi Company(a type of company in the Indian non-banking finance sector, also
known as mutual benefit company)
Lotteries (online, private, government, etc.)
Investment in Chit Funds
Trading in TDR’s
Any Gambling or Betting businesses
Cigars, Cigarettes, or any related tobacco industry
Housing and Real Estate (except townships, commercial projects, etc.)
18. 1. Government schemes like production-linked incentive (PLI) scheme in 2020 for
electronics manufacturing have been notified to attract foreign investments.
2. In 2019, the amendment of FDI Policy 2017 by the government, to permit 100% FDI
under automatic route in coal mining activities enhanced FDI inflow.
3. FDI in manufacturing was already under the 100% automatic route, however, in 2019,
the government clarified that investments in Indian entities engaged in contract
manufacturing is also permitted under the 100% automatic route provided it is
undertaken through a legitimate contract.
4. Further, the government permitted 26% FDI in digital sectors. The sector has
particularly high return capabilities in India as favorable demographics, substantial
mobile and internet penetration, massive consumption along technology uptake
provides great market opportunity for a foreign investor.
