The term FDI is an abbreviation for “Foreign Direct Investment” and refers to the direct investment that any foreign company makes in another country, by the act of buying that company or by expanding some existing business in the country.
The ways of making foreign investment include, setting up an associate of the company in the foreign country, acquiring shares of the company or via a merger etc. Unlike, the indirect investments where the institutions abroad invest in the equities listed on a nation’s stock exchange, direct investment allows entities a higher degree of control over the company wherein it invests. A larger amount of FDI is a characteristic of an open economy which has good prospects of growth.
From the view point of the accounts of a country, FDI also refers to the net incoming investment (incoming-outgoing investment) in acquisition of minimum management interest of 10% or more of voting stock in the economy where the investment is being done.
Every country has its own set of FDI rules that decide the way he foreign country can conduct business. A foreign company interested in investing in an Indian company can take two routes-automatic and government route. In case of automatics route, no prior approval from Government of India or RBI is required to invest in sectors/ activities that are defined in consolidated FDI policy. Activities, other than those covered in FDI policy require government approval which involves decision by the Foreign Investment Promotion Board, Department of Economic Affairs, and Ministry of Finance.
The key benefit of FDI is the foreign capital and funds that it brings to the country where the investment is made. Besides, it enables the exchange of skill sets, information and expertise, job opportunities and also leads to an increase in the productivity levels. Many Asian progressive economies like China, South Korea have experienced booms in their economies due to higher proportion of foreign direct investment in their economies. From economic perspective, the FDI can be defined as the measure of foreign ownership of domestic productive assets including factories, organizations, land etc.
With internet having changed the rules of businesses across the world, FDI no longer demands huge capital and physical investment. Advent of small internet start-ups which require lesser investment and economies becoming knowledge oriented that lay emphasis on human capital instead of manual labor has altered the FDI operations largely. FDI has already captured the advanced economies of the developed nations like U.S. and is currently moving towards the developing nations where the FDI flows are growing better.
FDI is being looked upon as a way to internationalize and have global presence for many industries and companies. This also provides an excellent tool to the government to check the local production and also trade to be carried on freely without any barriers. With FDI coming, setting up of locally based sales offices ensures that companies are able to approach the customer directly.