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Explained: Types of FDI

Explained: Types of FDI

FDI or foreign direct investment is an investment made by a foreign entity (individual or firm) into a business based in another country.

The biggest difference that distinguishes between foreign direct investment and foreign portfolio investment is the notion of ‘lasting interest.’ To cement a foreign investor’s lasting interest, they are given at least 10 per cent voting rights in the business.

FDI investment in India is made under two routes- automatic and approval or government. While a prior permission from the Reserve Bank of India and other ministries is required while making an investment through the government route, no such approval is required under the automatic route.

When capital is not readily available within the country, foreign direct investment becomes a significant source of funds for companies and businesses. Today, many Indian businesses also are looking for funds from foreign investors as an alternative to raising capital from within. This is because of relatively higher rates of interest and rigid regulations when borrowing from within the country.

A non-resident of India is also allowed to invest in India and is subject to FDI rules and regulations under the automatic or government route. This is not applicable to a citizen Pakistan or an entity incorporated in Pakistan.

There are mainly two types of FDI- Horizontal and Vertical, However, two other types of foreign direct investments have emerged- conglomerate and platform FDI.

  1. HORIZONTAL FDI: under this type of FDI, a business expands its inland operations to another country. The business undertakes the same activities but in a foreign country.
  2. VERTICAL FDI: in this case, a business expands into another country by moving to a different level of the supply chain. Thus business undertakes different activities overseas but these activities are related to the main business.
  3. CONGLOMERATE FDI: under the type of FDI, a business undertakes unrelated business activities in a foreign country. This type is uncommon as in involves the difficulty of penetrating a new country and an entirely new market.
  4. PLATFORM FDI: here, a business expands into another country but the output from the business is then exported to a third country.

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