A foreign direct investment (FDI) is an investment made by a firm or individual based in one country into a business located in another country. Under FDI, an investor does not simply purchase equities of foreign-based companies but establishes foreign business operations or acquires foreign business assets— the former is called foreign portfolio investments, which is differentiated from foreign direct investment in terms of lasting interest.
What is notable is that the investors not only bring in money but also new technology, managerial expertise, new ideas and more employment.
Foreign direct investment by an individual or a company based outside the country is regulated through two routes- the automatic route and approval route.
1) The automatic route
Under this route, investment into different sectors is less restricted. Foreign direct investment norms and regulations are more liberalised. Here, the overseas investor or the Indian company does not require a prior approval from the Reserve Bank of India (RBI) or government of India for investment into the country.
2) Approval route
The approval route is a little restricted. The foreign investor or the Indian company has to take a prior approval from the Reserve Bank of India (RBI) or the government of India before making an investment.
FDI benefits both the global and domestic economy— both the investors and recipient. Some pros of foreign direct investment are outlined below:
- FDI helps in diversifying investors portfolios
- It promotes stable long term lending
- The most obvious pro is that FDI provides financing to developing countries
- It provides technology to developing nations
- Brings in technical knowledge and managerial skills
- It also helps generate more employment opportunities
- FDI is a critical driver of economic growth
- International investments also helps improve domestic infrastructure
A foreign investor can invest in an Indian business through the following means:
- Acquiring voting stock in a foreign company
- Mergers and acquisitions
- Joint ventures with foreign corporations
- Starting a subsidiary of a domestic firm in a foreign country
Foreign direct investment equity inflows in India amounted to USD 456.79 billion during April 2000 to December 2019, according to the data released by the Department for Promotion of Industry and Internal Trade (DPIIT).