FDI or Foreign Direct Investment is an investment that is made by an individual or a firm in one country, towards a business in another country. FDI usually takes place when the investor acquires foreign business assets or establishes business operations. However, FDIs is different from portfolio investment options.
What are the rules for FDI?
On 17th April 2020, India made some changed to the FDI in India policy. The idea behind the alterations was to ensure that Indian companies are safeguarded from the opportunistic takeovers and acquisitions of Indian companies, under the light of COVID-19 pandemic.
Here are some basic takeaways related to FDI in India:
- FDI investments are made by one company into the another one that is located in another company.
- FDIs are utilized in the open markets, instead of the closed markets.
- The three types of common FDIs are horizontal, vertical, and conglomerate. Each has its own USP.
- FDIs into USA is continuously tracked by the Bureau of Economic Analysis.
How a Foreign Direct Investment Works?
Foreign Direct Investment that is made in the open economies offers the skilled workforce average or actually, above average growth prospects for the investor. FDI frequently involves more than mere capital investment. It is inclusive of provision of management or the technology. The major highlight of FDI in India is that it establishes effective control or at the least, substantial influence on the foreign business.
Countries tend to turn towards the U.S.A, using the capabilities to manufacture, while the U.S.A provides a large scale benefit to the economy when better utilized.
What are the Three Types of Foreign Direct Investment?
- Horizontal Direct Investment – When an investor establishes similar kind of business operations in a foreign country, as the one in the home country.
- Vertical Investment – When a business establishes different yet related business activities as the main business in a foreign country.
- Conglomerate Investment – When the company or the individual ensures that a foreign investment in a business is made which is unrelated to the existing business in the home country. It can be better understood as a joint venture.
Special Considerations related to FDI In India
FDI can be made in a variety of ways. The subsidiary or the associate company present in the foreign country who are acquiring a controlling interest in an existing foreign company or by merger with a foreign company. The threshold for an FDI in India to control the overall interest is abided by the guidelines established by the OECD. The controlling interest in the firm can be established with about less than 10% of the company’s voting shares. There’s lot more left to discover and know about FDI in India. Keep reading our blogs for more such informative content.