FDI as a Driving Force for Emerging Economies

A developing country is on the cusp of progressing into a developed nation. The people and leadership are always striving to make the best of every available opportunity to put the nation on the world map. Of all the different options, there is one that provides enormous scope – foreign direct investment inflow (FDI inflow).

Not only developing economies, but developed nations are also able to sustain their growth because of FDI inflows into their country. The top three countries that saw the highest FDI inflow in the first nine months of 2021 were the United States ($253 billion), China ($249 billion) and the United Kingdom ($52 billion).

Seeing figures like these, the question arises – how exactly does FDI help in the development of a country? Also, how to bring more of it into a country?

Let’s answer these questions in detail in this article.

How Does FDI Work?

Foreign direct investment (FDI) is the cross-border investment by an entity to acquire a stake in an enterprise in a foreign economy. Investment transactions result in enhanced and resilient relationships between economies. It becomes one of the major external financing sources for industries to achieve sustainable development goals.

If we consider India, the importance of FDI is immense. It acts as a fillip to spark the developmental process of a nation. It is more stable than foreign portfolio investment (FPI) and foreign institutional investment (FII), both of which fall under the ‘hot money’ category.

FDI grants the investor a stake in the company they invest in. It is a long-term strategy with various benefits for both the investing and the invested parties. Let’s look at some of the primary ones:

a) Growth of domestic firms – The main reason why businesses seek foreign investment is because they need to expand their market presence. India is currently one of the most attractive destinations for FDI. The proof is in the figures. As per the data furnished by the Department for Promotion of Industry and Internal Trade (DPIIT), FDI equity inflow in India stood at $560.78 billion for the period between April 2000 and September 2021. This incredible figure shows the level of interest of foreign investors in India’s industrial capabilities.

With this amount of foreign investment, Indian businesses are able to achieve explosive growth rates. External funding sources are especially beneficial for startups that have not yet found their market footing.

b) Technology and information exchange – The second merit of FDI is seen in the give and take of technology and knowledge between the participating economies. Generally, an investing entity brings modern technology and expertise while being granted access to the resources of the country of the company receiving the foreign direct investment.

Take the recent pandemic for example. The world was in dire need of vaccines to protect against the COVID-19 pandemic. While various countries reeled in their fight, India used innovative approaches to not only combat the pandemic effectively but become the healthcare manufacturing hub for the world. According to the union health ministry’s data, 60 percent of the global vaccine production is done in India. As a result, more foreign medical companies are turning to India for their healthcare needs.

Between April and September 2021, the computer software and hardware sector attracted the maximum investment of $7.12 billion, followed by the automobile sector receiving $4.93 billion, and the services sector came in third place with $3.15 billion in investment.

c) Employment generation – One of the top issues of concern in a growing economy is the lack of jobs. Developing countries often see quite an increase in population over the years. This leads to significant demand for employment opportunities.

FDI has helped various industries attain incredible levels of employment. For example, as per the All-India Quarterly Establishment-based Employment Survey (AQEES) for 2021, the manufacturing sector employed 39 percent of the total employed workforce spread across all industries.

More foreign funding leads to the proliferation of organizations with more people being employed in offices and factories, empowering a country’s growth engine.

FDI Trends and Factors

Foreign investors are constantly seeking avenues of development. Rapidly developing economies like that of India offer a bright future for an investor’s assets. The major share of foreign investment in India is currently flowing into sectors like

1. a) Information and communication technology (ICT)
2. b) Renewable energy
3. c) Stock market IPOs
4. d) Startups

There are numerous factors that contribute to the interest of foreign investors in Indian businesses. Some of the recent government measures in this direction are as follows:

1. PM Gati Shakti plan – This scheme aims to break the departmental silos to change the way projects are executed. The scheme involves comprehensive planning and holistic implementation to address multi-modal and last-mile connectivity concerns.
2. PLI scheme – The production-linked incentive (PLI) scheme is one of the most innovative policies of recent times. The scheme will allow Indian industries to boost manufacturing capabilities, increase the amount of exports and reduce India’s dependence on imports.
3. Single window clearance portal – Many investors are hesitant to invest in another country due to the long, drawn-out and complicated process of getting approvals. The single window clearance portal makes it possible for investors to apply for bringing foreign investment into India and get the approvals as well.
4. GIS-mapped land bank – Using geographic information system (GIS) technology, investors will be able to spot their ideal location for investment. The database will show the vacant industrial plots available for investors across the nation.

FDI for Growth

The benefits of FDI for the investor and the receiving country cannot be dismissed at all. With FDI inflow, Indian businesses can reach their true potential and offer the investing entity a chance for the same.

FDI India will help you connect with the right investor to boost your business operations. We will support your business during and even after the investment process. Reach out to us for more details about our solutions for businesses.