Foreign direct investment or FDI is a type of investment in the form of controlling ownership where an investor invests into a business that is based in another country. The main difference between foreign direct investment and foreign portfolio investment is the notion of ‘lasting control’ that comes with some control over business decisions. ‘
A foreign investor gets a minimum of 10 per cent voting rights in the business for an investment to be considered as FDI.
An overseas investor can get voting power of a firm in a given economy by the following methods:
- By obtaining shares in an associated company
- By incorporating a full owned subsidiary
- By the means of a merger
- By obtaining an unrelated enterprise
- Through an equity joint venture with another venture or company
Foreign direct investment is a two way street with benefits for both the host economy and foreign investor/ business.
FDI benefits for the host country
- FDI is a critical driver of economic growth and therefore stimulates economic development.
- FDI helps in creating more jobs in the host country.
- FDI allows access to new technology and better infrastructure.
- FDI brings in technical know how and managerial expertise
FDI benefits for the foreign investor and business
- Foreign investors get tax incentives and subsidized rates
- They get relatively cheaper labour costs
- FDI allows market diversification
- Prefrential tariffs is a big advantage
India, over the years has liberalized FDI norms in order to attract more foreign investors in the country. While most of the sectors of the economy are open to foreign investments under the automatic route of approval, there are some sectors where little or no investment is allowed by the government. These sectors include: lottery business (government, private, and online lotteries), gambling and betting activities, atomic energy, nidhi company etc.
Today, more and more established or aspiring business people are turning towards obtaining funds from outside India. One reason to do so is the high rate of interests of funds. Another reason that accompanies these high rate of interest is the hectic processes in place.