Three Types of FDI Explained
Foreign direct investment is an investment made by an entity living outside the country where the investment is being made by either buying a company there or expanding its business in the domestic country.
Foreign direct investment contributes much more than just monetary funds in the development of a nation. Apart from being a critical factor in driving economic growth, it also helps in bringing new technology into the country, generating more employment opportunities, bringing in managerial expertise and know how, leading to an improved infrastructure, etc.
When capital is not readily available within the country, foreign direct investment becomes a significant source of funds for companies and businesses. More and more businesses are today turning towards this option because of heavy guild lines when raising money locally.
Foreign investors can invest in India under two routes- the Automatic Route and the Government or Approval Route.
Under the automatic route, no prior government approval is required. That means that a foreign investor does not have to go through the government and different ministries to be able to make an investment in an India company. Under the government route, however, a prior approval from the government is mandatory. Rules and regulations under the government route are more stringent as compared to the automatic route where they are relatively more relaxed.
There are three ways in which investment can be done in an Indian business:
- Vertical Investment
Under vertical investment, a business that is differentiated to an extent is established in a foreign country.
- Horizontal Investment
Under this type of investment, an investor opens the same business in a foreign country.
- Conglomerate Investment
Under the conglomerate investment type, an investment is carried out even if the business is unrelated or different to its existing business.
The foreign investor is given at least 10 per cent voting rights in the company. Therefore, we can conclude that a prerequisite for FDI is lasting interest and controlling ownership. It is not simply the transfer of funds and hence is differentiated by foreign portfolio investment or FPI.