Foreign Direct Investment – Definition, Examples, Functions, Pros, Cons

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Foreign direct investment (FDI) is among the largest direct investments between countries. In contrast to an FPI investor, an investor in a single nation can control any foreign firm or organization receiving investment funds from that nation. Foreign direct investment (FDI) is a significant factor in determining the political and economic stability of a nation.

This shows that a country is more likely to have a thriving economy if it receives a large quantity of foreign capital. FDIs results in decreased tariffs, tax advantages, and a diversification of businesses. Foreign aid recipients benefit from increased employment opportunities, an economic boost, and access to cutting-edge technologies and management techniques.

Foreign Direct Investment Definition

When a foreign company or individual acquires an interest in a domestic company, this is refer as foreign direct investment (FDI). Foreign direct investment is distinguish from foreign portfolio investments by the accumulation of long-term interest. FDIs can be achieve by the acquisition of a long-term interest or the international expansion of a business.

Foreign direct investment (FDI) is a long-term investment made by a party in one country in a company or business in another. Typically, this expression alludes to a firm’s decision to acquire a substantial chunk or the entirety of a foreign company in order to expand into a new geographic region. Foreign stock investments are a relatively recent phenomenon.

Overview of Foreign Direct Investment

Investments abroad might be categorize as “organic” or “inorganic”. Foreign investors can employ organic investments to extend and grow existing firms. A firm makes an inorganic investment when it purchases a company in the country where it intends to invest.

Foreign direct investments (FDIs) can help struggling enterprises in developing and expanding economies like India and South-East Asia. The Indian government has taken initiatives to enhance investments in defense, telecommunications, government-owned oil refineries, and information technology.

FDI is debt-free capital that can assist India’s development. It is the product of globalization and internationalization. Stephen Hymer, the “Father of International Business,” anticipated in the 1960s that the expansion of foreign investment would continue to be robust for three reasons.

It allowed greater control over global corporations. It also helped corporations eliminate monopolistic practices. Third, and most importantly, such investments provide organizations with a buffering effect in the case of a rapid and unexpected decline in business activity. The market will forever have imperfections.

FDI Examples

Over the past decade, India has consistently attracted different types of direct foreign investment. Foreign investment has inundated nearly every industry, from pharmaceuticals to automobiles to textiles and railways. According to the “World Investment Report 2020” published by the United Nations, India received $51 billion in FDI across all industries in 2019. In terms of FDI, India has exceeded both China and the United States by 2015.

The importance of foreign direct investment cannot be overstated. It has improved infrastructure, generated new jobs, boosted exports, and assisted the formal sector. The majority of India’s FDI comes from Singapore, the United States, Japan, the Netherlands, and Mauritius, according to available data. Here are some significant examples of foreign direct investments in India.

Silver Lake’s online Ed-Tech firm raised $500 million in September 2020. Silver Lake is a well-known equity and venture capital business in the United States. Google acquired a 7.73 percent share in Reliance’s “Jio Platforms” for USD 4.5 billion. This was a noteworthy deal. The well-known New York City private equity firm General Atlantic invested approximately USD 900 million in Reliance’s “Jio Platforms”.

Pros of Foreign Direct Investment

Both nations benefit from direct foreign investment. A result of these benefits, both parties are incentivize to utilize FDI. These advantages help organizations reduce expenses and risk. Economic gains accrue to the host nation.

Businesses gain from a diverse clientele, favorable tariffs and subsidies, tax benefits, and cheaper labor costs. The host country benefits from economic growth, human capital expansion, increased employment, and management expertise, skills, and technology.

Cons of Foreign Direct Investment

FDI has many benefits, but also two major disadvantages: displacement of local firms and repatriation of profits. Numerous nations have put restrictions on foreign direct investment because of its detrimental effects.

If Walmart is permssible to enter the market, local firms may be wipe out. Walmart’s low prices are considered to be driving out smaller local firms. The most significant issue with companies repatriating profits is that they are not reinvest in the home nation. Consequently, capital exits the host nation.

Procedure for FDI

An investor can make a direct investment by expanding a company into a foreign country. Amazon’s migration to Vancouver, Canada, is one example. Foreign direct investments include reinvesting abroad profits and lending to foreign firms inside the same corporation.

There are numerous ways for a domestic investor to get voting rights in a multinational company. Examples include establishing a foreign subsidiary of a domestic company, acquiring voting shares in a foreign company, engaging in mergers and acquisitions, and forming joint ventures with foreign firms.

Functions of FDI

Foreign direct investment firms seek businesses in only open economies with competent labor forces and above-average growth prospects. People want lax government oversight.

FDIs extends beyond capital investment. Possible provision of management, technology, and/or equipment. Foreign direct investment requires effective control of a foreign business or significant influence over its decision-making.

Difference Between FDI and FPI

Let us understand FDI vs. FPI in this session to understand the concept properly.

  • Foreign portfolio investment (FPI) refers to the addition of international assets to the investment portfolio of a company, organisation, or individual. Using this method, you can diversify your portfolio by purchasing international equities and bonds.
  • A “effective controlling interest” can be achieve by acquiring fewer than 10 percent of a company’s voting shares. Control is essential for direct investments abroad. Control involves aggressively supervising and influencing a foreign corporation’s commercial operations. This is the key differential between FDI and equity and bond portfolio investments.
  • FDIs is a substantial commitment to a company’s growth.
  • FDI refers to a significant investment or acquisition of a foreign-based company.
  • Foreign direct investment and foreign portfolio investment are commonly approve in developing nations. FDI requires greater adherence to the laws of the host nation.

Conclusion

The threat of foreign influence is one of the primary worries of nations in the process of economic development. When governments transfer huge sums of money, the funds constitute an investment in the market of the country from where the funds originated. Investing specifically through FDI in emerging markets is risky. Examples include political unrest and regional conflict. This could emerge as a government that is less investor-friendly.

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